Question: what does a building wear? Answer: address. Location counts. But so does cost. Despite gloom in certain parts of the market, London’s office sector is flourishing. At least on paper. In central London, big tenants cannot find enough space. Vacancy rates at 5 per cent are about half that in New York City. Overseas investors may find the situation particularly tempting now the trade-weighted index for sterling is close to a two-decade low.
Central London offices yield about 4 per cent. European cities such as Paris and Frankfurt offer a quarter less. The new Crossrail train line will improve accessibility from the suburbs — where employees live — when it finally opens in 2021. That has encouraged some tenants to leave expensive West End offices for cheaper addresses in the City. Demand for office space is being driven by the technology sector, not finance. Google and Facebook need plenty of room to grow.
Time for international investors to return. The first quarter of this year was the slowest for commercial property in 10 quarters, according to data from real estate consultancy Lambert Smith Hampton. But the allure of higher yields, at a time when US interest rates could fall, has breathed new life into overseas buyers. Pushing back the deadline for Brexit until at least October appears to have no harm either. Local investors such as Canary Wharf and Landsec have struggled to close on targeted properties as sellers feel less inclined to discount prices.
There is one wrinkle in the cloth. Newfangled serviced offices from WeWork and others have been the marginal leaser of available space in London. This group accounted for about a fifth of new London office deals in the last two years from a tenth five years ago, according to data from JLL. Still, buyers can lock in both cheap finance and tenants while receiving relatively healthy rental returns, without using excessive debt. Given these attractive yields there is no reason for overseas investors to stay away.
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