Some £1.4 billion was in December alone, taking the total for the year to £8.4 billion, the highest level of turnover in this market since Savills’s records began in 1995.
The report says that it would be all too easy to attribute this volume of turnover in the market to the safe haven characteristics of London and its appeal to non-domestic investors, and the data shows that buyers from outside the UK accounted for 64% of the purchases. However, 2013 saw a significant increase in acquisitions by domestic investors, who purchased £2.9 billion of assets over the course of the year.
It points out that this pick up in activity was driven both by private investors, who were more active due to the improving availability of debt, and of property companies who acquired some major sites such as British Land's £470 million purchase of the 1.2 million square foot office led Paddington Central scheme.
Non-domestic investors however still continued to be the most active buyers of very large lot sizes in the West End, with 80% of the purchases by values of West End lots of £100 million and above being by investors from outside the UK.
Investor interest in residential conversion opportunities accelerated in the second half of 2013, perhaps as a result of the rising expectation that Westminster Council could soon produce their much talked about consultation paper on this subject.
Prices for any office building that has the potential for conversion to residential have risen considerably over the last year. ‘This even applies to assets with well secured income as investors identify value in the differential between the entry price and residential resales on the finished product. The next wave of conversion opportunities is likely to be driven by the sales of small embassies and consulates, as well the headquarters buildings of various trusts, institutions, charities and associations,’ the report explains.
‘Many of these parties are currently looking at the value and their recent rise of their central London properties and considering whether moving to a fringe location would free up significant amounts of capital that could be reallocated elsewhere,’ it adds.
Savills predicted in its August 2013 report that prime office yields in the West End would harden from 3.50% to 3.25% by the end of the year, and the prediction proved correct
This hardening has also been seen in the IPD average office yields for the West End and Midtown, with the average equivalent yield hardening by 44bps over the last six months to 5.28% in January 2014, and the average initial yield hardening by 55bps to 3.49%.
‘Purchasers are increasingly turning to the equivalent yield as a more useful indicator of pricing, as they have become more convinced that the rental recovery in the West End leasing market is sustainable,’ says the report.
‘We expect that investor demand for West End offices will be steady over the next 12 months, though the actual volume of transactions is unlikely to reach 2013's record high.
The big question has to be whether yields will continue to shift downwards, particularly since they are currently nearly 200bps lower than their 25 year average of 5.0%,’ it explains.
‘Improving rental growth prospects will undeniably help to support current yields. Non-prime yields are however likely to see pressure and fall, consistent with this phase of the cycle, as investors seek enhanced returns and show a willingness to take greater risk,’ it adds.