Middle Eastern investment into central London offices is the busiest it has been since pre-pandemic levels, according to new research from BNP Paribas Real Estate.
As of November 2023, Middle Eastern investment into central London offices stands at £621 mln and is already in line with the previous 5-year average from 2018 to 2022 at £618 mln. This period also marks the busiest for Middle Eastern office investors since 2019 when the first nine months reached £817 mln.
James Carrington, head of City investment at BNP Paribas Real Estate said: 'Central London commercial investments have become more attractive as Middle Eastern cost of capital is now more in sync with what the market has to offer, with sovereign wealth funds, institutions and family offices becoming more active across the risk-return spectrum spanning core, core+, and value add. There is also less competition for deals over £100 mln facilitating opportunities for Middle Eastern investors to provide liquidity in the market.'
Prime West End locations are the ‘hottest’ in terms of pricing, with yields remaining relatively robust and standing at 4.15%. Other submarkets of the West End such as Fitzrovia and Covent Garden, as well as core City of London locations have seen further movement on yields and are now providing some interesting opportunities. This, combined with continued strong rental growth prospects for best-in-class assets, particularly in the core West End where supply remains constrained, creates the potential to realise excellent returns over the next 5 years, according to the broker.
Carrington: 'For those investors willing to roll their sleeves up and target core+ or asset management opportunities, particularly in improving EGS credentials, the margin for entry price and potential exit values is accentuated. To give this context, prime office rents across the West End have reached £150 per ft2, up 7.1% year-on-year, with experts forecasting significant growth over the next year and beyond. Rents in the City remained at £72.50 per ft2, however, premium rents achieving £90.00+ per ft2 are becoming commonplace.'
Looking ahead to commercial investing in 2024, Carrington added: 'There is a window of opportunity to secure central London office and retail investments next year at opportunistic capital values which have corrected faster than almost every other European counterpart. Supply has been limited, however, as valuations become more realistic and debt providers encourage more ‘consensual’ sales, we envisage more stock will become available next year, particularly in off-market scenarios.'
In addition, commercial real estate is set to become more attractive in 2024 as pricing stabilises and other asset classes, such as Gilts and cash returns sharpen, he added. 'The key will be to be selective, targeting assets with strong property fundamentals, including core locations and ESG credentials which either exist or have the potential to provide. These assets will not only see a stronger recovery, but also ensure the occupational demand is captured with premium rents and growth being achieved on those best-in-class assets.'
