Cushman & Wakefield: Central London investment volumes lowest in 3 years

The fall-out of the credit crunch continues to impact the Central London commercial property investment market which saw just £2.83 billion (aprox. ?3.35 bln.) transactions take place during the first quarter of 2008, according to the latest Central London investment market figures from global property consultant Cushman & Wakefield. The figure is significantly down on the same quarter last year during which a total of £3.9 billion worth of transactions were traded and is the lowest Q1 volume recorded for more than three years.

According to Cushman & Wakefield figures, the total turnover for the City for Q1 was approximately £1.25 billion, around half that for the same period in 2007. In comparison to the average of the last four quarters, when some £2.5 billion worth of property was traded, this quarter has seen an approximately 50% reduction in turnover by comparison.

Bill Tyser, partner, City investment at Cushman & Wakefield said: “Generally leveraged buyers have found it extremely difficult to find properties with sufficient returns to match a more difficult and more expensive credit market. Therefore whilst there still remains a large weight of investor money prepared to consider acquisition in the market, the lack of credit and low property returns is and will for the time being hamper wider activity and the resumption of a more balanced market.”

The figures show that approximately £600 million of this total was generated from deals agreed over the the Christmas and New Year period and into the early part of the first quarter of this year. During this period when interest rates reduced and were predicted to reduce further (allowing an easing in Libor and SWAP rates), some UK retail funds needing to raise cash for redemptions placed a number of assets under offer or exchanged during the closing stages of the year.

Deals that have exchanged and completed this quarter amounted to just under £300 million and deals that have exchanged but not yet completed account for approximately a further £300 million.

With prime yields currently settling at around 5.5% we have seen the return of some German funds who can, coupled with the availability of large capital allowances, achieve returns of or close to 6%. They have accounted for a large proportion of activity during the course of this first quarter.

Whilst investment volumes in the West End of London in Q1 were close to the average levels attained in 2007, the majority of the £1.57 bn value of transactions taking place were largely a result of institutions selling during the early part of the quarter to satisfy redemptions. This institutional activity has now largely ceased.

The market continues to be dominated by overseas private buyers, property companies and funds with the UK property companies making a return to the market.

Q1 figures are also distorted by a few large transactions including Invista portfolio £200m, GPE/Co CO deal with Crown Estate at £350m, and sale of Metropole Building for £130m.

Clive Bull, head of central London investment at Cushman & Wakefield: “There remains a significant amount of equity looking to get into the London market as evidenced by the increased activity from the overseas buyers. There is understandable caution in the occupational markets but in the City and particularly in the West End, the office vacancy levels remain extremely low.”

Tim Sketchley, chairman capital markets group, Cushman & Wakefield, said: “We seem to be moving into the phase of the investment market where there is a mismatch between vendors ambitions and the investors’ view on reality. It is difficult to envisage where the market will find sufficient liquidity to reinvigorate itself within the short term but there is no doubt that there is a large appetite for prime product which is unsatisfied at the present moment from both domestic and off-shore investors. As we forecasted at the end of last year this market may well ’de-laminate’ with the prime market remaining firm and with the secondary still showing pricing weaknesses for some months to come.”