As a lender, an asset’s location is often as important as the quality of the sponsor. London is a market we know incredibly well and we have provided real estate finance across multiple cycles in the UK for 30 years, including over £1.6 billion since April 2021. We remain confident in its resilience on the global stage, even in the face of significant macroeconomic headwinds.
London benefits from a number of defensive characteristics versus other parts of the UK due to its position as the dominant financial and cultural hub. While companies may be reducing their quantity of office space, they will likely retain a headquarters in London at the expense of regional satellites. Savills figures show that across 30 deals in 2021 and H1 2022, Professional sector companies that moved offices reduced their square footage by 28% in the regions, whereas in Central London they are growing their office footprints.
Whilst the future of HS2 hangs in the balance, the capital has seen multibillion pound regeneration and development projects such as Battersea Power Station and Crossrail, which have both opened in the last few months, as well as the ongoing regeneration of the E14 precinct by Canary Wharf Group, Brent Cross by Argent Related and Wembley by Quintain. These significant commitments from the government and major global real estate players provide comfort to less established businesses considering their own investments in and around those locations.
Additionally, the weakness of the pound has piqued the interest of international investors looking to capitalise on favourable exchange rates, with London still seen as a safe haven for capital deployment over the long term. The Investec Economics team noted that "the decline in sterling relative to its major currency pairs over the past year continues to create unique opportunities for overseas investors to gain access to the lucrative central London market at more favourable rates”. Across all sectors, a downturn sees a flight to quality as investors hope to limit risk and unlock value.
The weakness of the pound has piqued the interest of international investors looking to capitalise on favourable exchange rates, with London still seen as a safe haven for capital deployment over the long term.
The prospects for the capital’s Living sector, where we have lent over £900 million since the start of 2020, look especially resilient.
The Build to Rent (“BTR”) sector is characterised by London’s acute housing shortage. This imbalance is unlikely to change as a result of planning challenges and the cost of land; headaches for our clients but drivers of higher valuations and inflation-linked income, which are key in the current climate.
The exodus of people leaving London during the pandemic seems to be over and people are returning to the office as the reality of the cost and duration of a long distance commute hits home. The threat of a recession is accelerating the trend. A recent LinkedIn study found that three-quarters of executives intend to rein in flexible working because of the worsening economic backdrop. The expectation that this outflux of people and jobs would be permanent hasn’t materialised – as it didn’t following the Brexit referendum in 2016.
We have clients in the BTR sector that have seen rental growth of between 10-15% in the last year in London, while rising energy costs are attracting renters to schemes where bills are included as a means of hedging against further increases, as well as providing certainty over their outgoings.
Purpose Build Student Accommodation (“PBSA”) is another sector benefiting from a significant supply-demand imbalance. London has the UK’s highest number of world-renowned academic institutions, with a higher proportion of international students compared with other parts of the country. In the 2022/23 academic year, there are expected to be 280,000 full-time higher education students seeking accommodation in London, but there will be just over 102,000 PBSA beds to rent – a shortfall of almost 178,000.
63% of respondents in our 2022 Private Client Sentiment Survey cited London as very appealing for real estate investment, putting it significantly ahead of Birmingham (46%) and Manchester (45%). Our deep client pool has a strong bias towards London and we expect the current market volatility to further enhance its appeal.
While we expect the market volatility we saw in 2022 to continue this year, we are encouraged by the continued opportunities we are seeing from our clients. In a sea of uncertainty, shrewd and astute investors have and will be able to capitalise on distress and opportunities in London but also further afield and will need funding partners who have in-depth market knowledge, can provide flexible and customised solutions, and have the ability to act quickly.