London Office Market Insights Q2 2024

London's office investment market remains subdued, characterised by a notable absence of the traditional year-end transaction rush in 2023 and minimal activity in the first half of 2024. High borrowing costs and a persistent gap in pricing expectations between buyers and sellers are key factors suppressing activity, particularly in larger-scale deals. Over the past year, only $5.1 billion has been invested in London offices, well below the 10-year annual average of $15.7 billion. Most market participants do not foresee a significant rebound in investment volumes until at least late 2024.

Despite the overall quietness, yields have stabilised following an approximate 100-basis-point increase during the downturn. Expectations of interest rate cuts throughout the year are anticipated to bolster pricing and deal flow moving forward, though recent hopes have not translated into immediate deal closures. Notably, two major transactions were withdrawn recently as owners opted to delay sales and explore refinancing options, anticipating a potential price recovery later in the year. These include the halted sale of 5 Churchill Place in Docklands and the aborted sale of 20 Old Bailey in the City by Korea's Mirae.

In contrast, there are signs of adjustment in pricing for core office properties in central areas like Farringdon Station. For instance, UBS Asset Management acquired Bloom Clerkenwell for £230 million at a 5.3% yield, reflecting a pricing shift compared to previous transactions in the area. Lower down the price spectrum, where the buyer pool is larger, transactions appear more resilient. A recent example includes a private Spanish investor purchasing 8 Bleeding Heart Yard near Farringdon Station for £52 million at a keen 4.3% yield.

Recent significant deals often involve value-added or redevelopment strategies, as equity-rich investors capitalise on reduced prices and less competition from leveraged buyers. This trend aligns with the ongoing flight-to-quality theme expected to persist into the next market cycle. Noteworthy transactions include Edge and Mitsubishi's acquisition of a prime redevelopment opportunity on Shaftesbury Avenue, underscoring the attractiveness of such investments amidst current market conditions.

The vibrant submarkets of Noho and Soho in the West End have been particularly attractive for opportunistic investments, especially near new Elizabeth line stations. In late 2023, Lothbury and Japan's Nomura jointly purchased a stake in M&G's Fitzrovia development for £180 million, indicative of growing Japanese investor interest in London real estate. Additionally, properties with conversion potential, such as office-to-hotel transformations or redevelopment into life science facilities, continue to draw interest, exemplified by recent deals involving Whitbread Group and Royal London.

Outside central London and parts of west London, the focus remains on opportunities for office-to-residential conversions, reflecting broader market strategies amid current economic conditions.

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