Capital into UK property: London’s capital status defies the UK downturn

  • According to The Property Archive, Q2 UK investment volumes were £8.92bn –14% up on Q1 2012 and a third more than Q2 2011.
  • Average initial yields rose everywhere except for in London. IPD reported a 2% fall in capital values in the first half of 2012, as UK austerity measures and Europe’s debt crisis stifled growth outside London.
  • Central London offices were strong, but major Q2 deals included student housing, data centres and Battersea Power Station.

The UK’s status as a safe haven from euro uncertainty continues to attract overseas buyers, who accounted for 56%, or £4.97bn, of the total invested in Q2, dominating the market for the fourth consecutive quarter. UK institutions followed, accounting for 17% of volumes, or £1.5bn.

At £8.9bn, total Q2 investment was 14% up on Q1, taking the first-half total to £17.91bn, against £15.3bn in the first half last year. US buyers accounted for£3.45bn of overseas capital in the first half, followed by Middle and Far Eastern investors. The latter included a Malaysian consortium that bought Battersea Power Station in London (see table).

In the first half of 2012, overseas investors spent £4.95bn on offices and £1.39bn on industrial, while UK institutions spent £0.96bn on offices and £0.71bn on retail.

Overseas investors were also the most  active first-half sellers, with 26.8% of sales, worth £4.41bn. Irish and US investors each accounted for 35%, the former driven by debt problems and the latter realising profits.  A need to meet fund redemptions meant Germans accounted for 18% of disposals.

UK unlisted property companies and institutions sold £3.0bn and £2.95bn of assets respectively in the first half of 2012. All types of investors mainly sold offices. UK listed and unlisted property companies were the first half’s largest net disinvestors, at £1.86bn and £1.16bn respectively. Both were realising profits on investments, which suited overseas buyers, as Hammerson’s sale of its London office portfolio illustrates.

Since Q1 2009, US investors have been the largest net investors, at £5.25bn, followed by Far East investors, at £4.92bn and Middle East investors, at £3.78bn. The biggest net disinvestors were the Irish, at -£6.87bn.

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Central London attracted 57% of first-half investment, or £9.45bn; overseas investors favoured it, while UK unlisted and listed property companies put stock on sale.

Average initial yields rose 29bps to 7.47% in Q2. Office yields rose the most, by 88bps to 8.43%. Yields rose in all regions except for central and outer London. There, they fell 67bps in both cases, to 5.2% and 6.5% respectively, reflecting sustained demand.