Middle East buyers to lift office gloom

Marion Dakers
OFFICE investment in London fell markedly in the first three months of the year, though higher oil prices are expected to drive more sovereign wealth funds into real estate in the capital, according to Knight Frank research seen by City A.M.

Office properties worth £1.6bn are due to change hands in the three months to the end of March, down from a bumper quarter at the end of 2010 when £3.6bn-worth of investments were made, according to the estate agent’s figures.

While a drop in the first three months of the year is normal, “it is impossible to ignore the fact that this slowdown has coincided with an uncertain time for the global economy,” said head of central London research James Roberts in the report.

Foreign investors, particularly from China and Korea, have propped up the market, with the few UK funds involved in deals largely selling their properties.

“The downbeat economic news and unrest in the Middle East has cast a shadow over sentiment,” the report said. “However, medium-term this will probably benefit the London investment market as we expect more sovereign wealth and oil economy interest.”

While volumes are down, the agent has seen signs of a return to riskier properties in recent months, which can offer higher rental yields than prime office space.

Prime rents in the City remain steady at £55 per square foot this quarter, meaning a 5.25 per cent yield for landlords. A lack of available space in the West End has squeezed rents up to £90 per square foot.

Available space in central London continues to fall, though Knight Frank said tenant demand remains “unspectacular”?given the ongoing economic uncertainty.