Investors set to swoop on London commercial offices

BNP Paribas Real Estate research shows that Middle Eastern investment into central London offices is the busiest it has been since pre-pandemic levels. 

As of November 2023, Middle Eastern investment into central London offices stands at £621m and is already in line with the previous 5-year average from 2018 to 2022 at £618m. This period also marks the busiest for Middle Eastern office investors since 2019 when the first nine months reached £817m.

James Carrington, head of City investment at BNP Paribas Real Estate explains: “Central London commercial investments have become more attractive as Middle Eastern cost of capital is now more in sync with what the market has to offer, with sovereign wealth funds, institutions and family offices becoming more active across the risk-return spectrum spanning core, core+, and value add. 

“There is also less competition for deals over £100m facilitating opportunities for Middle Eastern investors to provide liquidity in the market.

“Prime West End locations are the ‘hottest’ in terms of pricing, with yields remaining relatively robust and standing at 4.15 per cent. Other submarkets of the West End such as Fitzrovia and Covent Garden, as well as core City of London locations have seen further movement on yields and are now providing some interesting opportunities. 

“This, combined with continued strong rental growth prospects for best-in-class assets, particularly in the core West End where supply remains constrained, creates the potential to realise excellent returns over the next 5 years.”

“For those investors willing to roll their sleeves up and target core+ or asset management opportunities, particularly in improving EGS credentials, the margin for entry price and potential exit values is accentuated.

“To give this context, prime office rents across the West End have reached £150 per square foot, up 7.1 per cent year-on-year, with experts forecasting significant growth over he next year and beyond. Rents in the City remained at £72.50 psf, however, premium rents achieving £90.00+ pdf are becoming commonplace.”

And he adds: “There is a window of opportunity to secure central London office and retail investments next year at opportunistic capital values which have corrected faster than almost any other European country. 

“Supply has been limited, however, as valuations become more realistic and debt providers encourage more ‘consensual’ sales, we envisage more stock will become available next year, particularly in off-market scenarios.

“In addition, commercial real estate is set to become more attractive in 2024 as pricing stabilises and other asset classes, such as Gilts and cash returns sharpen (see below UK 10-year Gilt yield forecast). The key will be to be selective, targeting assets with strong property fundamentals, including core locations and ESG credentials which either exist or have the potential to provide. 

“These assets will not only see a stronger recovery, but also ensure the occupational demand is captured with premium rents and growth being achieved on those best-in-class assets.”