£41bn investor dry powder targeting central London office and retail assets in ‘triple-tiered’ buyer market

BNP Paribas Real Estate has announced a forecast of £41bn for the total international investor dry powder that is currently targeting both central London offices and retail assets this year in what it defines as a ‘triple-tiered’ buyer landscape.

The figure, which calculates the estimated total capital waiting to be deployed into the market, is based upon analysis of completed and pending deals, together with BNP Paribas Real Estate’s indepth market intelligence through its global network and private banking platform.

Fergus Keane, head of central London investment at BNP Paribas Real Estate, commented: “Its penalty time for international investors looking at London and they have until the summer to convert. The market is all about relationships at the moment, and there are more fireside chats than ever happening around pricing, in an effort to bridge the dichotomy on pricing between vendors. Investors are armed with significant capital expenditure, around £41bn, for office and retail assets, but they are seeking values ideally at around 75-80% of last year’s pricing in what we identity as a three-tiered landscape.”

The three tiered landscape is defined by investors looking for either:

  • Ultra-prime ESG assets that suit long-term buyers and tenants seeking out the best green buildings.
  • Opportunities to upgrade less fit-for-purpose buildings in a yield play.
  • Obsolete stock in a repurposing play to secure operational returns that the likes of a residential or a hotel asset can provide.

According to initial Q1 2023 data, central London office investment activity is returning to relatively normal levels, with at least £2.5bn likely to complete by the end of March. This will mark a 182% increase on the £0.9bn that transacted in Q4 2022. The firm expects prime office yields to peak for the key central London markets at circa 4.75% – 5.0% for the City, and 4.0% for the West End.

In London’s retail sector, whilst the luxury and supermarket / convenience sectors have been resilient, investors are now considering the mass market retail sector given the correction that has occurred in pricing and rents in recent years.

Keane added: “With tourism numbers now reaching pre pandemic levels and other changes around internet saturation, repurposing of department stores and indeed Crossrail now open; markets such as Oxford Street and Regent street are becoming very interesting in central London for the first time in a long time.”

BNP Paribas Real Estate’s analysis follows its review of the government’s December 2022 MEES figures, which, inclusive of buildings that are currently eligible for exemptions, it is estimated that over 50% of inner London commercial stock could, under proposed MEES regulation changes, be unlawful to let from April 2027 (Grade D, E, F & G).

Keane concluded, “Grade A stock is becoming a higher reach and assets are getting ever closer to a tipping point in light of the likes of MEES legislative changes where they may not even have a letting audience at reduced rents or any rent in time potentially. The time to sell for many could be now before it is too late.”