£60B In Foreign Investment Heading To London As Green Buildings Attract The Green
As much as £60B of overseas capital will be spent in the London office market between now and the end of 2027, a new report predicted, with the number of sustainable buildings in the city a key draw for investors.
Knight Frank’s annual London Report, released today, said the £60B that could be spent would be the highest five-year total for two decades.
U.S. institutional investors will be the most acquisitive in this period, with £15B expected to be allocated toward London office assets. Substantial volumes of capital from Germany (£6.6B), Greater China (£6B), Singapore (£5.5B) and South Korea (£4B) will also fuel record investment activity.
With £5.3B in deals currently under offer, 2022 is expected to see £10.5B of global capital investment flow into London offices, a 17% rise compared to 2021. This will be driven by pent-up demand being released as cross-border travel and social restrictions ease, Knight Frank said, as well as a broader investor base looking to deploy capital into grade-A offices with strong lease terms and sustainability credentials.
London’s attractive pricing compared to other cities and its greater number of BREEAM-rated stock — estimated to be around 1,078 offices, more than double any other European gateway city — are key contributing factors, with investors looking to future-proof portfolios against obsolescence risks and meet sustainability targets.
Knight Frank’s analysis of data looking at green ratings and office assets found that prime central London office buildings with a BREEAM Excellent or Very Good rating enjoy a 10.5% and 10.1% premium on sales price, respectively, compared to equivalent unrated buildings. With 2021 seeing a 50% increase in central London office take-up at 8.2M SF leased and 7.5M SF of current live requirements, occupier demand for best-in-class space also continues to position the city positively.
About £2.6B in U.S. capital is expected to flow into central London office assets in 2022. This will be followed by Germany (£1.1B), Greater China (£1.1B) and Singapore (£1B).
The forecast follows a strong 2021, which saw investment transactions for London offices hit £12.3B, £3B higher than in 2020, representing the highest annual increase since 2017. During the year, international capital allocations toward the London office market also increased by £1B, with U.S. investors representing £2.4B of the £9B in foreign investment flows.
There was a strong return of UK-based investors accounting for £3B of transactions. Flows from UK institutions are likely to continue as the occupier market strengthens with about 25%-30% of future transaction volumes.
“London’s attractive pricing and above inflation income opportunities mean that global investment volumes are expected to continue increasing steadily over the next five years,” Knight Frank London Research Partner Shabab Qadar said in a release.
“With peak uncertainty around Covid-19 and Brexit now behind us, the easing of cross-border travel and improving economic outlook has coincided with a positive structural shift in the real estate allocations of long-term global investors," Qadar added. "Given that a substantial wall of capital is competing in a market with low levels of available stock, we expect investors to increasingly seek repurposing opportunities within the secondary market, targeting the double-digit green rental and sales premium available.”