When All This Is Over, London Investment Will Bounce Back Fast
Liquidity has all but dried up in the central London investment market. It feels like it might never come back. But it will.
Whether it is V-shaped or U-shaped, when recovery does arrive, London will be among the first cities where real estate investment recovers, according to a new analysis from Real Capital Analytics.
RCA examined how the real estate investment markets of major European and global cities performed in the wake of the last financial crisis. It found that the most liquid markets, defined as having the highest number of transactions and of buyers and sellers, were the first to see pricing return to pre-crisis levels.
For example, central London was the most liquid market before and during the 2008 crash, saw the shallowest decline in liquidity, about 10%, and was the first major European city to see liquidity levels bounce back. Pricing levels closely track liquidity.
Liquidity reached a trough in mid-2009, RCA data showed, and while it did not achieve pre-2008 levels until 2013, by the end of 2010 central London was close to its former level.
By contrast, Frankfurt was only slightly less liquid than London going into the crisis, but saw liquidity fall by more than a third before starting to recover, and it has never attained previous levels.
London was not quite as high on investor buy lists coming in to 2020: It was the eighth most liquid market in Europe at the end of 2019, according to RCA, and the 13th most liquid in the world. RCA named it the most liquid global city at the end of 2015.
The reason of course is political uncertainty caused by Brexit. With that removed, liquidity had come back to London, with the first quarter seeing £4.2B of deals transacted. That is lower than the £6.5B of deals in Q1 2019, but December 2019 saw a record £5B transacted in London, as pent-up demand for investment was released following the general election and greater clarity on Brexit.
And when the coronavirus recedes, London is again likely to bounce back more quickly than other markets.
“Structurally more liquid markets outperformed during the last global downturn and were the first to regain prior pricing when the markets recovered,” said Tom Leahy, RCA senior director of EMEA analytics.
“A lot of the barriers to investment that caused London to slip down the rankings have largely been removed, so I would be optimistic that London will continue its recovery when this is finished. You saw quite a lot of big deals, and volumes were good in London before the lockdown started.”
Leahy pointed out that yields were higher in London than in other major European cities like Paris, Munich or Berlin, and so the city offered better returns for investors, before the effect of cost of debt was taken into account.
What might change is the composition of the London investment scene, especially in the short to medium term before the market becomes fully normalised. London is heavily reliant on overseas capital — in an average year as much as 80% of central London investment is undertaken by foreign firms.
While international travel is reduced, this investment will inevitably slow, as large real estate deals are rarely completed without physical viewings. Leahy said this might make it harder for Asian investors without a local office to undertake deals, and this would present an opportunity for domestic investors or large European or North American investors who do have a London presence.
“In that sense it would be less badly affected than a market like Warsaw, which is heavily reliant on overseas capital and doesn’t have a deep domestic investor base,” he said.
