London investment set for a rebound in 2021

• The 2021 Knight Frank Global Capital Tracker shows £46 billion of spending firepower has amassed globally for deployment into London’s commercial market
• London was the world’s number one city for cross-border commercial office investment during 2020
• London was also the top destination globally for private investors seeking commercial assets last year

Strong finish to 2020

Up until the start of the Covid-19 pandemic, London’s office investment market was defined by a distinct shortage of investment stock. In fact, as we started 2020, there was almost £50 billion actively targeting commercial office assets in London according to the Knight Frank Global Capital Tracker; however, this was matched with just £2.3 billion of options, spread across 40 assets.

The pandemic brought the market to a virtual standstill, with the UK’s first lockdown and accompanying global travel restrictions tempering investment activity significantly. However, the tide turned last summer and investment volumes rebounded sharply as investors began homing in on London as the city emerged as a global investment safe haven, just as it has done during past crises.

Read: What's next for London's commercial investment market?

This momentum was retained through to the end of last year, with the final three months of 2020 capping an extraordinary year for the London investment market. Just as in most years, Q4 was a bumper quarter. Despite all the challenges, £4.9 billion worth of deals were transacted, well above the usual £3.4 billion quarterly average and almost three-times higher than Q2 and Q3 2020 combined.

“There was a notable rebound in activity during the closing months of 2020.”

Pent up investor demand resulted in several deals closing in December 2020, including Allianz’s £400 million purchase of a 75% stake in a British Land portfolio. There was a notable rebound in activity during the closing months of 2020 as investors moved to deploy the dry powder amassed over the course of the year into assets delivering long-term income opportunities, with December alone registering deals totalling £2.3 billion.

Indeed, not only was London the world’s number one city for cross-border commercial office investment during 2020, it was also the world’s top destination for private investors seeking commercial assets.

Read: Private wealth remains focused on London

2021: the year of the rebound

The momentum is expected to continue into 2021, with the London office market now having 58% more stock available than at the beginning of last year and greater clarity following the EU trade deal.

Clearly, the latest lockdown will dampen some of this momentum, but there are many investors keen to buy into the inevitable recovery early, as reflected in the results of our 2021 Global Capital Tracker Survey, which tracks London-bound dry-powder capital. This is, in effect, capital that has an interest in deploying into London.

That potential this year? Close to £46 billion. It is 5% lower than it was during 2020; however this change will have negligible impact, particularly considering the double-digit declines in cross-border investment recorded globally. It should be noted that this figure is still 15% up on 2019.

Also worth pointing out is that 87% of investors that intended to invest at the start of 2020 would still invest now, with the remainder being fresh capital requirements. So once again, demand for London remains robust in arguably the most challenging times in a generation.

“Greater China, with the key being Hong Kong SAR, will be the largest source of demand in 2021.”

So which regions have the greatest spending power? Greater China, with the key being Hong Kong SAR, will be the largest source of demand, with £12 billion of spending power identified – that’s over a quarter of the total. The next largest pool of capital has been identified across Europe (£5.8 billion), followed by Singapore (£5.1 billion).

At almost 50%, investors from across Asia have been found to have the strongest intention to invest in London’s office market this year.

What about the propensity for deployment?

So while our Global Capital Tracker has shown the depth of global intent to invest in London’s office market this year, we have gone a step further in our analysis to predict the likely volumes of capital to be deployed. The results of our London Capital Gravity Model, which factors for variables including geographic distance between world capitals and London, global share price performance, foreign direct investment, exchange rates and GDP growth, mirrors the findings of our Global Capital Tracker, with US investors expected to be the biggest spenders this year, followed by investors from Greater China.

Read: Forecasting future capital flows