Wealthy Investors Spend £1.3 Billion on London Offices

Posted by Knight Frank Newcastle on 11th September 2023 -

Volatility caused by rising interest rates has created new opportunities for wealthy investors across asset classes, but few sectors have seen an influx of cash-rich buyers quite like the London office market.

Subdued capital values, the weak pound and reduced competition from debt-reliant purchasers paved the way for private investors to spend £1.3 billion on the capital's offices in the past twelve months. That's a 44% share of central London office investments, up from the long run average of 36%.

Fewer prime assets have been listed for sale amid the volatility, so wealthy buyers spent £690 million on secondary stock, or “brown” buildings that require capital expenditure to meet modern
workplace and sustainability standards. These buyers generally target smaller lot sizes to avoid taking on debt, and deal values averaged £62 million during the period.

Nick Braybrook, head of London capital markets at Knight Frank, shared more details with the Times earlier this week - particularly on the softer factors that play when wealthy individuals make purchases:

“Try telling an investor around Mayfair and St James’s that the return to the office isn’t quite what it should be. If they get a chance to buy a freehold on Berkeley Square, they’re going to do it."

House prices decline

UK house prices fell 1.9% in August, bringing the annual decline to 4.6%, Halifax saidyesterday. The typical UK home now costs £279,569, down around £14,000 over the last year but still £40,000 above the level at the outset of the pandemic.

Mortgage rates rose steeply in June and most of July before easing on the publication of better inflation figures. That easing continued through August and into September, which is positive, though fixed rates starting with a five are still significantly higher than borrowers are used to. Almost six in ten property owners remortgaging this year are rolling off deals with sub-2% rates, according to official figures.

Declines will have further to run as the market adjusts to the new era of higher borrowing costs -"A single-digit decline this year is likely to be repeated next year," said Knight Frank's Tom Bill. "A strong jobs market, lender flexibility and the prevalence of fixed-rate deals in recent years will all act as shock-absorbers but sentiment will only improve when there is more certainty that the current cycle of rate hikes is over. Even then, the adjustment to higher borrowing costs and the looming general election mean we don’t expect a housing market firing on all cylinders.”

Affordability improves, a bit

Strong income growth and easing house prices have, on the surface, improved affordability for first-time buyers. The house price to income ratio for typical first-time buyers now stands at 5.1, down from a peak of 5.8 in June last year, the Halifax said.

That will be at least partially offset by higher mortgage costs, which is driving demand for longer mortgage terms. Taylor Wimpey last month said the share of its first-time buyers taking on more than 36-year mortgages had more than tripled.

New British lender Perenna will launch mortgages with fixed rates for 20 and 30 years by the end of the year after receiving full regulatory approval at the start of September, the FT reported yesterday. These longer deals are similar to those available in the US and Europe, but have never really taken off in the UK, in part due to the high charges for exiting the deals:

“In this country, you have fixed rates with early redemption charges — and typically the longer the fixed rate, the higher the charge,” Simon Gammon of Knight Frank Finance told the paper.

Planning

Housebuilders are scaling back delivery to adjust to slowing sales rates and to offset risks presented by an unpredictable, poorly funded planning system.

Across England, the number of major residential planning decisions granted in the second quarter this year fell to levels not seen since 2009, according to official figurescompiled by Anna Ward (see chart). Overall, decisions granted fell 13% on quarter to 898 in Q2 this year - the lowest quarterly level on record since Q3 2009.

We've looked previously at figures showing that the vast majority of local councils are failing to process most applications for major developments within the statutory 13-week time frame. The figures published yesterday showed little improvement - councils decided 20% of major applications (resi and commercial) within the statutory period of 13 weeks April-June this year, up one percentage point from Q2 last year.

Inflation

In recent notes we've covered the growing body of evidence from both sides of the Atlantic that suggests jobs markets are cooling and that rising prices will continue to slow over the coming months.

Businesses expectations of inflation and wage growth continue to fall back, according to the latest Bank of England survey. Year-ahead output price inflation was expected to be 4.9% in the three months to August, down from 5.2% in the three months to July. Expected year-ahead wage growth remained the same at 5.0% on the month in August, a slight decline on the previous quarter and well below the 6.9% rate of growth we're currently seeing.

A separate survey by the Recruitment and Employment Confederation out this morning showed employers cut their rate of hiring last month by the fastest rate in three years.

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