Financing Future Growth and The Role of Global Capital
In this section we highlight how the mega trends affecting how we live, work and socialise are leading to changes in how long-term international investors allocate capital globally and across different asset classes. We show there is potential for significant capital deployment in real estate and that London needs to build upon the solid foundation already in place to increase its share of global capital flows.
3 minutes to read
Investment in London real estate: the start of the next cycle
We believe that in a post-pandemic world, capital flows will be influenced by a number of structural factors that will lead to greater allocations of capital to real estate. Furthermore, investors will favour cities that are well positioned to harness future economic growth opportunities. Locations supported by thriving knowledge and creative industries where sustainability and wellbeing are central to the curation of those locations. We explore three key factors below:
1. Allocations to real estate continue to rise.
The upturn in global economic growth has presented a number of challenges, namely - the dislocation of supply chains, labour shortages, higher inflation and the end to an era of ultra-low interest rates. These will all have profound implications to investors capital allocation decisions. Global institutional investment portfolios currently show an average allocation of 10.7% to real estate a figure expected to rise to 11% in 20221. This annual increase of 0.3% represents an additional $80-$120bn of capital to be deployed to real estate globally. During the last decade institutional portfolios have been under-allocated to real estate due to stronger return expectations in other asset classes and a lack of institutional grade stock in gateway cities.
In our recently conducted Capital Tracker Survey we asked global investors about their intention to invest in London offices in 2022. This revealed a targeted capital allocation of £48.1bn, up from £46.0bn in 2021. The change was driven by large rises in target allocations from US and European investors and a fall from the Greater China region. There is clearly very strong appetite to invest to London offices, however, opportunities to invest are affected by limited availability of institutional quality assets. This weight of capital combined with well-functioning debt markets provides the basis for financing the redevelopment of the built environment that is underpinned by sustainability goals.
2. The role of ESG in attracting capital
London can already demonstrate to global investors progress toward becoming a more sustainable city. Our research on sustainable cities, where we computed ‘sustainability scores’ based on carbon reduction criteria across 286 cities globally showed London is the highest ranked green city followed by Paris, New York, Seoul and Tokyo. Developers and landlords in London have made considerable strides in integrating sustainability practices during the life cycle of a building. This is illustrated by the number of buildings in London which have achieved a BREEAM rating of Good or above – 1078 office buildings. This is more than twice the number in Paris the next largest gateway city. In addition, London has more office buildings rated ‘Excellent’ than Paris has rated ‘Good’ or above. Our recently released Active Capital Report demonstrated office buildings in London with an ‘Excellent’ rating have achieved a ‘green’ sales premium of 10.5% compared to equivalent unrated buildings and a 10.1% premium where the BREEAM rating was ‘Very Good’.
3. Innovation hubs attracting increasing levels of capital
The importance of high-quality academic institutions in London and proximity to Oxford and Cambridge Universities as led to the creation of innovation districts and vibrant new office submarkets in White City, Kings Cross and the Southbank. The regeneration of these locations and the bespoke curation of real estate uses and the public realm creates a sustainably led ecosystem in which knowledge based industries are able to monetise cutting edge research. For financially constrained local authorities it grows their revenues and provides communities with opportunities to upskill and develop careers in future growth sectors such as life sciences, health and Ed Tech.
1. Cornell University and Hodes & Well Associates 2021 global real estate investment allocations survey.
Find out more at our virtual London Breakfast event, click here to register.
Download the London Report 2022