London, renowned globally for its financial clout and as a prime destination for international capital, wasn’t immune to the 2022-23 market upheaval, seeing a 49% drop in investment. High borrowing costs dented investor confidence, leading to a decline in global real estate investment. Deals exceeding £100 million, vital for driving investment volumes, were particularly affected. These buyers, often reliant on leverage, found rising interest rates lessening the appeal of financing, thereby reducing such transactions.
Amidst the downturn, some investors anticipate a recovery. Blackstone’s recent £230 million purchase of 130-145 New Bond Street might spark a resurgence in substantial deals. There could be an opportunity now to capitalise on the market’s potential rebound.
Data reveals a stark reality: in 2023, deals over £100 million in Central London dropped by 51% compared to the previous five-year average and 60% compared to the previous ten-year average. The £150 million-plus category saw an even steeper decline, with the City experiencing a 59% drop and the West End an 83% drop compared to the previous decade’s averages. These figures highlight a market ripe for disruption, presenting a unique chance for investors to benefit from reduced competition and favourable valuations.
History offers valuable lessons for predicting future trends. Comparing past market downturns, like the post-Global Financial Crisis period, reveals the market’s cyclical nature and how quickly liquidity for larger transactions can recover after a shock. It took 12 months from the 2008 low point for larger transaction numbers to start recovering, and just an additional 24 months to return to pre-GFC levels. After 18 months of subdued deal flow and one of the quietest Q1 periods on record in Central London, a similar recovery trajectory could be on the horizon, even in the current different interest rate environment.
London’s swift repricing mechanics have made it attractive to investors during uncertain times. It has managed to reprice faster than other global markets. However, the lack of trades in larger buildings has created a pricing evidence gap. Values for larger buildings are being extrapolated from more abundant evidence of smaller building trades, with an arbitrary “discount for quantum” added. This method overlooks the competitive edge of larger buildings, which are fundamentally scarce, attract major corporate tenants on longer leases, and offer benefits related to capital expenditure, greening, and relative friction costs.
Consequently, prices for large buildings may have been driven too low despite their strong fundamentals. This softened pricing, along with reduced competition, provides investors a strategic advantage to identify and acquire assets with significant potential. The moment seems right for investors to pursue substantial deals in London. By leveraging current market dynamics, uncovering undervalued assets, and applying historical insights, investors can position themselves to benefit from this evolving market landscape.
Real Estate Credit Investments Limited (LON:RECI) is a closed-end investment company that specialises in European real estate credit markets. Their primary objective is to provide attractive and stable returns to their shareholders, mainly in the form of quarterly dividends, by exposing them to a diversified portfolio of real estate credit investments.
