London calling: an investment rebound
We have long argued that London’s real estate would benefit from ‘extra time’, i.e., an extension to the global economic cycle. Our latest statistics certainly point to this.
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- A sense of political clarity has removed one of the few reasons for caution towards London
- Weak Sterling and comparatively high yields mean London remains particularly compelling for overseas investors
- Capital targeting London assets could swell to £48bn, a 21% increase on 2019 levels
A reweighting to real estate
Globally, central banks have largely fought off the downturn predicted by some. Their rate cuts and stimulus measures have boosted economic growth. However, they have also come with sharp falls in market interest rates, exemplified by the large tranche of government debt globally which is now negatively yielding.
The result is a hunt for new sources of return. This has sparked a jump in capital allocations to real estate, from institutional investors such as pension funds, to private wealth – and London stands poised to benefit.
"The combination of a macro-reweighting towards real estate generally, combined with the current mix of London-specific advantages, will foster a strong rebound in London investment in 2020"
Our view is that the combination of a macro-reweighting towards real estate generally, combined with this current mix of London-specific advantages, will foster a strong rebound in London investment in 2020.
Much of this demand will remain global. Our capital tracker monitors a potential £48.4bn allocated to London real estate, up 21% from 2019.
The implications for pricing are clear: renewed downward pressure on yields, which should, in part, alleviate the current shortage of available investment opportunities.
Political clarity boosts demand
The emergence of greater political clarity at the end of 2019 has lifted one of the few reasons for investor caution towards the London market. It has left a market offering comparatively high yields and significant rental growth prospects.
For overseas buyers, the lack of a strong Sterling bounce has further anchored pricing at attractive levels, albeit some currency volatility can be expected this year as the UK works to carve out a new trading relationship with the EU.
Embrace the recovery, plan for resilience
But what of the longer term rationale for investment? Policymakers have succeeded in sustaining economic expansion, but the pace of that growth in coming years is forecast to be modest.
Consequently, we would expect real estate investors to be strategizing accordingly by:
- focusing heavily on understanding London’s local and micro-market dynamics
- keeping a keen eye to the future liquidity of acquisitions
- favouring selective development or repositioning angles, especially amongst those looking to bolster absolute returns
Underlying these factors will be a growing need to consider how the environmental sustainability of assets will increasingly impact both near-term investment performance and long-term liquidity. In short, despite a reprieve from recessionary scenarios, we still expect investors to act relatively defensively.
Finally, it may be argued that authorities have typically ridden to the rescue of markets over the past decade. They have lowered interest rates, enacted quantitative easing, and via governments, spent more. These options, while not yet exhausted, have certainly been depleted in scope for the foreseeable future. Can investors place as much reliance on such support in future?
"We are glad to share growing optimism over London’s economic outlook"
One proactive approach is to focus on the other tools by which cities and countries can support expansion: education and innovation. Locations that score well on their ability to monetise high-quality education and innovation are less reliant on the good fortunes of market trends or the generosity of institutions.
Our analysis, which ranks European cities by over 100 variables related to these factors, shows that London stands far above any other city in Europe. While we are glad to share growing optimism over London’s economic outlook, we believe these fundamentals should give even the most cautious commentators a high degree of confidence in its prospects.
