London’s office market to attract £3.9bn from Middle East investors despite Covid challenges

Overall investment capital of £46bn expected, says Knight Frank

London’s office investment market will attract £46 billion ($62.9bn) in capital this year as investors look beyond the Covid-19 pandemic and focus on the strengths of the UK capital’s commercial property sector, according to Knight Frank.

The top three locations “with the highest amount of dry power capital” earmarked to buy commercial assets in London in 2021 include Greater China (China, Hong Kong and Taiwan) at £12.6bn, Singapore with more than £5bn and the Middle East with £3.9bn, according to the property consultancy’s annual London report.

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“Despite the UK’s lockdown restrictions and the impact on global travel due to the pandemic, London’s appeal remains unwavering to global investors,” said Faisal Durrani, head of London commercial research at Knight Frank.

“This continues to be the case for Middle East investors who have spent £16.4bn over the last 10 years on London offices, accounting for just over 10 per cent of all London office investment.”

Britain saw the biggest rise in vacant shops in over two decades late last year, and the sharpest increase in empty offices since the global financial crisis of 2008-09, according to a quarterly study by the Royal Institution of Chartered Surveyors (RICS).

The RICS study showed a swing in demand towards industrial space - such as warehouses to service booming online shopping - and away from traditional retail and offices.

Forty-five per cent of working adults were working from home in the third week of January, according to the Office for National Statistics, the highest since June, after new restrictions were enforced across the country at the start of January.

RICS said office demand was weaker in London than elsewhere, especially away from prime locations, and surveyors do not expect any rise in office or retail rents for the next year at least.

However, Knight Frank said a development shortfall in London’s office investment market will spur future rental growth despite the pandemic-induced surge in remote working.

Only 3.2 million square feet of 26.6 million square feet of pipeline office developments tracked by Knight Frank will be delivered to the market by 2024.

At the same time, the long-run annual average take-up of new and refurbished space is 5.3 million square feet, said Knight Frank, with the supply and demand imbalance putting upward pressure on rents in the longer term.

London’s reputation as a safe haven and leading global city is also still an attraction for international investors, particularly as returns are attractive compared with other European and global gateway cities. Removal of the ‘no deal Brexit’ risk premium will be a further catalyst for capital markets activity, Knight Frank said.

“The pandemic will likely go down as one of the greatest disruptors commercial property has ever seen, however we may be on the cusp of a post-pandemic road to recovery for real estate,” said Mr Durrani.

The pandemic has also accelerated the focus on high-quality offices, with businesses increasingly choosing modern workplaces that offer amenities, wellbeing and sustainability. Knight Frank expects demand for prime offices to intensify, relative to poorer quality buildings, creating a greater disparity between the prime and secondary markets.

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London also boasts the highest concentration of green buildings globally, at almost 3,000, offering opportunities for “green” investors and those looking to rebalance their carbon targets.

“Once you factor in a requirement for buildings to meet increasingly ambitious ESG [Environmental, Social, and Governance] credentials, it is clear the volume of office space available to satisfy demand for prime office space is limited," Mr Durrani said.

In Britain's residential sector, house prices fell in January for the first time since the introduction of a stamp duty holiday, according to the Nationwide Building Society, indicating that a mini market boom might be over as the end of the tax break approaches.

The average price of a house fell by 0.3 per cent from December to £229,748.