Worse than the year after the Brexit vote or the pandemic. Worse even than the financial crisis. Last year, London office investment fell through the floor, with MSCI figures showing transactions across the capital at just £6.4B, the lowest figure this century.
Larger transactions over £100M all but disappeared, as family offices and opportunistic private equity investors snapped up smaller lots but institutional and international property investors stayed away, resulting in the lowest average deal size on record at £30.7M.
Transaction volumes in London have nose-dived in the past two years.
Yet at the same time, central London’s office leasing market demonstrated remarkable resilience, achieving an overall takeup of nearly 9.7M SF, up 1% on 2023 and the second-highest volume in the past five years, according to Cushman & Wakefield, propelling strong rental growth.
The hope a year ago was that 2024 would be the year the London office investment market recovered.
In the opening weeks of 2025, the market was boosted by Norges Bank Investment Management agreeing to a £306M joint venture with Grosvenor for a 25% stake in a mixed-use portfolio around Grosvenor Street and Mount Street. At the same time, Abu Dhabi-based Modon Holding bought into British Land and GIC joint venture Broadgate REIT to develop the 750K SF 2 Finsbury Avenue at Broadgate.
With a 25-basis-point cut in interest rates announced by the Bank of England on Wednesday, potential investors are looking closely to see whether this is a new horizon or a false dawn.
“With bond yields moving out so far over the last couple of years, it has been quite difficult to justify real estate investment. And so people have just been waiting to see if values recover, if they’re able to secure the allocations to push forward with opportunities,” Grosvenor Executive Director of Co-Investment Nathalie Hakim said.
“I think that’s the reason why the most active capital has been private wealth. But I sense that the institutions and the bigger investors are coming back now, given a slightly more stable political landscape.”
However, she said there remains a bifurcation between secondary and best-in-class offices, with occupational demand focused on the best space in the best locations, with more Grade B stock likely to be repurposed.
“Given the strength of occupational demand, especially in [the Mayfair] part of London, where supply is very constrained, values are very secure. And with rental growth the way it is, I think a lot of investors will have conviction that it’s an excellent place to invest,” Hakim said. “Currency is clearly a factor, but London, as a global city, will continue to attract a lot of investment. Last year was a little bit unusual, but we now have the ingredients to move forward, and investors do have a lot of dry powder. They’ve been patient for a number of years, and that’s quite unusual.”
The lack of institutional money meant last year was “very skewed” to the West End, with the markets dominated more by private investors and smaller lot sizes, according to BNP Paribas Real Estate Senior Director Larry Young.
“From about mid-last year, we started seeing a decent pickup in activity in general. The office-bashing story is not behind us, but it’s a lot better because occupational markets have picked up significantly for the best space,” he said.
However, adverse reaction to the autumn budget, which caused a spike in bond yields, and a more unsettled political situation globally dampened that momentum and “gave a little bit of a pause in the market,” Young said.
With interest rates coming down, if the economy doesn’t go into negative territory, then London will see more institutional money. From the beginning of the year, there has been a fair bit of activity, he added.
“As a caveat, with interest rates and bond yields fluctuating so much, that is causing problems for any investors that need to hedge sterling,” Young said. “There’ll be a tick up, but it’s not going to be massive. We could do with a good single-asset deal. If one of those happened, then that would certainly help and push things on.”
British Land Head of Real Estate and Investment Kelly Cleveland said many investors “have been waiting for somebody else to go first, particularly with core,” because investors have been uncomfortable about asset exits in an illiquid market.
“That’s starting to become banked now with investors, and they look at the supply pipeline and understand where rents are heading. The unknown was the ability to exit at the right pricing,” she said. “At certain points in the cycle, you’d be more likely to see private equity, but we might find that we whizz through that part of the cycle pretty quickly. There is institutional, sovereign, quasi-sovereign money looking to deploy.”
Cleveland also said that location had become even more important for occupiers and therefore investors to achieve top rents.
“That step change in rent that’s happened in the last six months looks set to continue, given how tight the supply pipeline is. It will be achieved on sites that are extremely well connected, close to really good transport links and also strong amenitywise, with good public realm,” she said.
“But because the supply of the absolute best-in-class pipeline is so low looking forward to 2028, there must be a spillover to other offices as well. And not every occupier wants to pay £120 per SF.”
The market is lacking a major transaction, with smaller lot sizes dominating.
While lack of supply of high-quality space has helped prop up the office sector, Nuveen Head of Offices, Europe Nick Deacon cautioned that the lack of supply may have papered over wider cracks.
“We subscribe to the supply crunch story. The London market has been mired by eight years of headwinds, and it has suppressed development activity and appetite to commit to [new] schemes,” he said.
“If you took this structural undersupply of stock away, the story for offices looks pretty bleak. We expect to see good rental growth across our portfolio, and we are having a really good run, because if you own the right stock in the right location, it feels like a home run. The luxurious debate that we’re having is, prelet or wait and play for the growth? But step out of these core markets, it’s still pretty patchy.”
Deacon also said the biggest threat to the current occupier story is that fit-out costs have increased materially, encouraging tenants to remain in their existing offices.
“If you roll back to when we were still granting 25-year leases, at the end of that lease expiry, the building was no good,” he said. “With shorter leases and better buildings, to lure people out of reasonably good premises and convince them to go through the cost and hassle of moving, you’ve got to provide something pretty compelling.”
As a consequence, if the demand side and development pipeline were both running at more normalised rates, capital markets would be far more challenging, he said.
“What we need for the market to operate efficiently is core capital, and that is being surprisingly lethargic,” Deacon said. “The capital that comes to the market will be very fussy, very picky, but our sense is the level of energy has increased materially this year.”
Right now, it is that “direction of travel” that is key to inspiring more confidence, according to Cushman & Wakefield Head of London Office Capital Markets Martin Lay, who said that he expects 2025 to see a slow recovery, not least because interest rates remain relatively high.
“We started the year with a bit of negativity from the budget fallout,” he said. “Then, lo and behold, you get the Norges and Modon Holding investments. It’s not as though this is just a UK issue in terms of slow growth. As shown by these two transactions, London is still an attractive location.”
And while one interest rate cut will not change the landscape, more might ease the debt and lending picture.
“There’s been a lot of stock that’s been stuck in the markets, which is effectively holding back others. It’s difficult for an investor to bring something out when something similar has been on the market for two years,” Lay said.
“So we need some of that previous stock to start trading in order to encourage investors to bring new opportunities. We are predicting greater activity this year than last. But clearly, that’s off a pretty low bottom. It’s difficult to go the other way.”
