Is the central London commercial property sector due for a rebound?
Despite London’s long established reputation as a global powerhouse and key destination for international capital, it couldn’t dodge the 2022-23 market turbulence, with a 49% drop in investment .
High borrowing costs impacting on investor confidence led to a global real estate investment decline. Deals over £100 million, which are crucial for driving investment volumes, suffered most during the downturn. These buyers often rely heavily on leverage, but rising interest rates made financing less attractive, reducing such trades.
Despite the downturn, some investors eye a rebound, with Blackstone’s recent £230m purchase of 130-145 New Bond Street potentially reigniting big deals. Could now be the time to capitalise on the market’s recovery – we’ve analyse some key drivers:
Capitalising on Market Dynamics
The data paints a stark picture: in 2023, the number of deals exceeding £100m in Central London fell by 51% compared to the previous five-year average and 60% compared to the previous ten-year average. In the £150m-plus bracket, the decline was even more pronounced, with a 59% drop in the City and 83% drop in the West End, compared to previous 10-year averages.
These statistics underscore a market ripe for disruption, presenting investors with a unique opportunity to capitalise on reduced competition and favourable valuations.
Harnessing Historical Insights
History serves as a valuable guide for navigating future trends. Drawing parallels with past market downturns such as the aftermath of the Global Financial Crisis underscores the cyclical nature of the market and the rapid rate of recovery of liquidity for larger lot sizes after a market shock. As shown in the chart below it took 12 months from the low point in 2008 for the number of larger transactions to start recovering and just a further 24 months for levels to return to pre-GFC levels.
We have now seen 18 months of muted deal flow accentuated by one of the the quietest Q1 across Central London on record. If the market follows a similar trajectory to that of the GFC, a recovery in deal volumes for all lot sizes and particularly the larger trades should be on the horizon albeit we do currently sit in the different interest rate environment.
Unlocking Undervalued Assets
One of the reasons that London has stood out to investors during this period of uncertainty, is its swift repricing mechanics, and it’s managed to reprice itself faster than other global markets. However, the scarcity of trades in larger buildings has created a vacuum of pricing evidence. Larger building values are having to be extrapolated from the more abundant evidence for smaller building trades with an arbitrary “discount for quantum” added on top.
This approach fails to recognise the competitive advantage larger buildings have due to their fundamental scarcity, ability to attract major corporate tenants on longer leases and benefits relating to capex, ease of greening and relative friction costs.
As a result, prices for large buildings may have swung too far given the strong underlying fundamentals. This materially softened pricing, combined with reduced competition, offers investors a strategic advantage in identifying and acquiring assets with untapped potential.
It seems the time is ripe for investors to act on big ticket deals in London. By making the most of the market dynamics, unlocking undervalued assets, and harnessing historical insights, investors can position themselves to take advantage of this ever-evolving market landscape.
Basil Walpole is Director of Central London Investment at Savills
