The outward yield shift recorded for Central London offices in Q4 2011 is a clear sign that the price demanded for office space in the capital has peaked and a period of consolidation is going to follow. 

These views are reported in UK Investment Transactions (UKIT) Q4 2011, our quarterly research report.

Central London offices most popular asset class

Central London offices continued to be the most popular asset class amongst investors with performance continuing to set the tone for overall market sentiment. Prime office space will always be demanded in the capital, but good secondary space is beginning to be regarded as overpriced. Central London Offices yields for Q4 2011 moved out to 5.62% from 4.90% in Q3.

Investment volumes in Q4 fell by 16%

Investment volumes in the market as a whole in Q4 fell by 16% from Q3 to £6.8bn as investors sought the relative safety of UK government bonds – this downward shift can be attributed to many factors, primarily the Eurozone debt crisis holding back investment by cash rich corporates, weak GDP growth and a severe lack of available debt.

Ezra Nahome, CEO, explained: “The Eurozone debt crisis is constraining expectations for 2012. Even if the Eurozone remains intact we are going to experience a period of stagnation which could stretch all the way into 2013. The outward yield shift for Central London offices is the clearest sign yet that the market is faltering.”

South East most active regional market

In the regional markets the south east was the most active in 2011, attracting 13% of the annual investment volume. Volume in other regional markets was lower due to a lack of supply and debt.

Key 2011 summary from UKIT Q4 2011:

• Equity rich investors from the Middle East, Far East and North America were the driving force behind the UK investment market in 2011

• Central London offices were the most popular asset class in 2011. Accounting for 28% of the annual total of £29.9bn

• The biggest net seller of property this year were UK private property companies

• Distressed asset sales by banks and LPA receivers stood at over £2bn for the year

Sale of distressed assets to increase

Looking forward, the sale of distressed assets by the banks and LPA receivers is expected to heighten in 2012 as banks look to deleverage. Ezra explained: “The major UK banks have substantial amounts of secondary and tertiary stock on their balance sheets. In 2011 we recorded over £2bn worth of distressed sales and over £1.5bn of debt sales and we are already aware of approximately £2.5bn worth of debt coming to the market in the first part of 2012.

“Inevitably the banks need to trim their balance sheets further before being able to materially lend. This is of course aside from all the additional legislation controls that are taking effect. There is a clear gap in the market to provide meaningful debt. It remains to be seen as to whether the insurance sector will fill it.”