Central London office investment volume recorded its strongest H1 since 2017, however that seems only half the story.
Property advisor, BNP Paribas Real Estate’ UK CEO, Etienne Prongue, said: ‘The speed of the interest rate hike has caught the real estate market by surprise. As it stands, rising debt costs and the deteriorating economic outlook are impacting pricing discussions, causing some sellers to pause disposals and wait for improved sentiment.
GDP growth in the UK slowed from 0.7% in Q1 to 0.4% in the three months to May, and the Consumer Prices Index (CPI) 12-month inflation rate reached 9.1% the same month.
Nevertheless, total H1 Central London investment total stood at £10.3bn (€12.4 bn), the busiest half-year on record, surpassing the previous high of £10.2bn set in 2017. Asia-Pacific buyers have accounted for around 40% of overall Central London office investment activity so far this year.
However, quarterly results to date have been impacted by market conditions.
Central London investment reached around £4.5bn in Q2 – 8% down year-on-year. The number of office deals transacting was less than half the 10-year pre-pandemic average, pushing the average lot size to record levels. Activity in the Central London office market was dominated by Q1, accounting for nearly two-thirds of investment.
BNP Paribas said investors were having to absorb substantially higher debt and construction costs, and that pricing had inevitably started to adjust, and sellers of big-ticket assets were having to either accept price adjustments or pause disposals.
As a result, BNP Paribas Real Estate’s prime City office yield has moved out from 3.75% to 4.00%, with pressure to move this out further.
Prongue explained: ‘Yields are beginning to soften in light of the challenging financial conditions, particularly for assets lacking in ESG credentials, or are noncompliant against shifting legislation. The market is now pausing for an adjustment in pricing – when it does, there is still plenty of equity ready to deploy. What remains unclear is how the leasing market will adjust in response to changing market conditions over the next 18-months.’
Vanessa Hale, head of research and insights explained: ‘As geopolitical tensions remain high and inflation continues to rise, the economic outlook remains challenged. Consumer confidence has fallen significantly in recent months as concerns around personal finances are exacerbated, meanwhile, businesses and investors are having to absorb rapidly rising finance costs, therefore applying pressure to the real estate market.’
