Investment in South Bank

Investment in South Bank

14 August 2015

Earlier this month Almacantar exchanged on its commitment to forward purchase the Shell Centre at Waterloo. This is a significant piece of business for the South Bank and is indicative of the appetite that currently sits in this market.We believe that there would be further investment transactions of this ilk but, this is stock dependant. Blue Fin is in play and this will again highlight the strength of Investor appetite for South Bank.

South Bank has always been a challenging market to acquire in, partly due to its size – it comprises just 20 million sq ft of office stock – and partly due to the significant number of assets held by non-Real Estate owners. In addition, in the past two years we have seen competition intensify; where previously you might expect half a dozen bidders on an asset, you will now have considerably more.

So, where is competition in South Bank coming from?

There remains strong appetite from Overseas Investors, who have been present in the South Bank market for a number of years, albeit slightly under the radar. St Martins is an exception; they were very early entrants in the London Bridge area and re - engaged with the record purchase of More London in 2014. As London has evolved, South Bank has become an increasingly attractive long-term bet for investors, as a centrally located overspill market for the West End and City, where demand perennially outstrips supply.

Behind this, the UK Funds continue to seek exposure but remain more risk-averse. Historically, their investment patterns have tended to follow the occupational market’s push south, but many have been reticent about placing capital too far from the river. As a result UK Fund exposure to South Bank has been limited, but is beginning to reverse as fund managers such as M&G, Henderson, Standard Life, Aberdeen, CBRE GI and DTZIM are drawn to the high returns on offer.

Moreover, there is greater confidence among UK Investors that South Bank as a market will not retreat. The better quality real estate, diverse mix of land uses, and most importantly a thriving occupational market give South Bank long-term stability. This is the paradigm shift that will reassure the UK institutions that it can reliably deliver mid-long term returns.

In my view, there is little to suggest that investor appetite in South Bank will wane. Whilst being one of the most accessible markets in terms of its geographical position within London, it remains one of the most underdeveloped. Performance is underpinned by a strong occupational market, and given the Availability Rate is less than 3%, with few signs it will materially change, we can expect rental growth to continue.

The challenge for investors is accessing the market and competing. Identifying off-market opportunities is the preference. While the more mature locations such as London Bridge and Bankside are clearly defined in terms of ownership, peripheral locations such as Bermondsey are not and therefore present opportunities. It will be intriguing to see how both Overseas and UK Investors assess the prospects of these areas moving forward.

Alastair Hilton, Partner at Union Street Partners