Even as the Omicron strain forces London’s white-collar workers to do their job from home, U.S. investors are eyeing the U.K. capital’s offices. Returns are better than other European hubs, but maybe not for long.
North Americans were the biggest purchasers of London offices in the fourth quarter of 2021, accounting for 39% of deals by value overall and 56% within the City of London district, based on data from real-estate firm Knight Frank. Typically, they make around one in five purchases.
The numbers may be skewed by the fact that Asian buyers, who usually dominate London deals, face travel restrictions. But higher returns on the city’s offices are also becoming a draw. Average rent yields on the best properties are around 4%, while in Paris and Berlin they are below 3%.
Prices have been suppressed in London mainly because of the risks of Britain’s exit from the European Union. The U.K.’s Office for Budget Responsibility estimates that leaving the bloc will reduce the U.K.’s potential gross domestic product by 4% over the long term, double the hit of the pandemic. But international investors seem increasingly willing to overlook this as they search for places to park cash.
Compared to major U.S. cities, London may be a safer bet as remote working takes hold. Supply of newly built offices with high sustainability ratings—the kind that big corporate tenants are now looking for as they try to hit their own net-zero targets—is tight in the British capital. Take-up of space is expected to be 4.7 million square feet a year between now and 2025, while just 8 million square feet of speculative office construction is slated to take place by then. Bank of America projects that rents for Grade A offices in London will increase by 5% a year between now and 2027 as a result.
Office landlords have a weaker hand in some large U.S. cities, which already looked oversupplied before Covid-19 hit. One in six San Francisco offices was vacant by the end of the third quarter, based on Colliers data. Even relatively new properties are proving difficult to fill: 18.3% of Manhattan offices built since 2015 were available to rent by the end of September. The vacancy rate for Grade A buildings in London was just 3.5% by comparison, according to listed landlord
Competition to buy the best London offices is growing, so the city may not look relatively cheap for long. Strong demand from tenants for Grade A buildings has encouraged buyers to stump up more, pushing down rent yields. In London’s premium West End district, yields tightened to 3.25% by December compared with 3.75% a year ago, CBRE analysis shows.
Low supply of the climate-friendly buildings that both investors and tenants now want could push London yields down further. Just 9% of the city’s office stock complies with sustainability standards that are likely to be mandatory in the U.K. by the end of the decade according to Bank of America estimates. Properties that don’t meet the grade will need heavy investment.
Despite questions about the future of offices in big cities, investors hunting for London’s trophy buildings could soon feel squeezed.
Write to Carol Ryan at firstname.lastname@example.org
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