The UK’s long term average share of global real estate investment is about 13%. Until early 2016, the level of UK investment moved in sync with the global total.
In the run up to the UK’s historic Brexit vote on June 23, 2016 a divergence appeared. Investment fell sharply and then fell further after the referendum, before rebounding in 2017 and 2018.
More recently, as uncertainties have once again increased, London investment volumes have been notably lower with the market experiencing a substantial deterioration and transaction volumes in Q3 2019 down circa 50% on the same period last year.
Notably over the last four years across the Eurozone, yield compression has knocked 200 basis points (bps) off income returns, a trend from which the UK has been immune with Central London yields remaining flat. Additionally, European cities are trading at a 150 bps premium to the long term average, whereas London remains level.
As a result, this differential now means that prime London offices are trading at a substantial discount and are offering favourable investment yields compared to similar assets in all of the major Eurozone capitals. This strategically positions London real estate for a rebound in activity once the Brexit dust settles, particularly for Eurozone investors who can benefit from Sterling’s significant depreciation.
Savvy investors with a long perspective may see this as a once in a generation opportunity to buy assets in the world’s fifth largest economy.
Furthermore, with current prime yields in major European cities seemingly still comfortably above the “net zero hurdle” of historic depreciation and management cost, this suggests that yields could compress even further in the short term if low interest rates continue to drive fixed income investors into real estate.
From the UK perspective, the fact that the gap between the “net zero hurdle” and prevailing yield is largest in London – and ahead of Paris and Frankfurt by some 100-125 bps – further supports the argument that greater relative value is to be found in the UK, and that once political turmoil is resolved a degree of “catch up” yield compression could take place.
There is a deep pool of international capital with an appetite to deploy into the UK and the lack of yield compression is making London look very good value. Coupled with the backdrop of an extremely robust occupational market, we are now expecting Central London office yields to fall in 2020 and Brexit could in fact be a ‘blessing in disguise.’
By James Beckham, Head of Central London Investment, CBRE