Following the record performance 
of the West End investment market 
in 2013, the first half of 2014 has broken yet another record with 
turnover reaching £3.1 billion, which is the highest level of turnover in the first six months of the year since our records began.

Six transactions over £100 million contributed to this strong performance, the largest of which (in a single transaction) was Perella Weinberg Partners acquisition of 33 Grosvenor Place for £204 million, reflecting 4.61% net initial yield.

Despite this large transaction from a US investor, overseas buyers have 
not dominated transaction volumes 
so far this year, unlike 2013. Increasing appetite from UK buyers has led 
to domestic investors purchasing £1.8 billion of West End assets in H1 2014, accounting for 59% a share. This follows UK buyers re-entering the market last year due to the increased availability of debt and being under pressure to buy, after being relatively quiet throughout the downturn. We also believe that some UK investor interest is being driven by the inability to deploy capital in the UK regions at sensible prices, which has refocused these fund's attention back on the more liquid growth stock in central London.

European and US investors accounted for 14% each following acquisitions in excess of £100 million by Meyer Bergman and Perella Weinberg Partners. Asian Investors have been notably quiet purchasers this year accounting for just 4% of transaction volumes compared to 22% over the same period last year.

The demand for West End assets has seen capital values surpass their 2007 peak for the first time since the downturn, in June 2014, IPD reported that values were 1.4% ahead of 2007 levels, significantly ahead of the All 
UK Property and City office capital value levels.

The rationale for selling at present is mixed, though the primary reason appears to be profit-taking on the back of the strong uplift in capital values over the last three years. Indeed, some investors who had bought over this period with the intention of keeping their assets for their long-term income growth potential are also considering bringing them to the market in the final quarter of 2014 or early 2015.

Yields

Savills prime hypothetical West End yield remains at 3.25%, its eighth month at this level. This low yield is supported by further compression of the IPD average equivalent yield to 5.02%, down from 5.21% at the start of the year. Prime yields will remain low so long as investor demand remains at above average levels, rents continue to see upward pressure and base rates do not rise at an unsustainable rate.

Outlook

A return of occupier confidence and signs of real rental growth returning to the occupational market the West End will continue to attract inward investment from domestic and non-domestic investors alike. This and forecasted work based employment growth of 7% in the borough of Westminster over the next five years (2014-18), according to Oxford Economics, cements the position of the West End as a popular destination for security and growth. However, what are the challenges that could derail the West End as a popular place for investment on a world stage?

The upcoming rise in interest rates, could have an impact on borrowing costs. Any initial rise however is likely 
to be minimal, with interest rates forecast to reach 2% over the next three years, which is relatively low in historic terms. Competition amongst lenders will also minimise this threat, with lenders' margins being adjusted to keep the overall cost of debt relatively stable. This, combined with the very small proportion of buyers who are actually using debt, should minimise the impact of rising interest rates. However, for multi-asset investors there will come a point where yields on bonds start to look more attractive than prime West End offices especially if rental growth ever hits a plateau.

Even against a background of rising interest rates, and a gentle rise in property yields, we expect to see continuing strong investor demand for both dry West End assets and asset management or redevelopment opportunities.

Taken from
Review and Outlook: Central London Offices - September 2014