The Potential Impact of Rising Oil Prices on London’s Prime Office Real Estate Market
The recent increase in oil prices could provide a boost to London’s prime office real estate market, according to Morgan Stanley.
Historically, Middle Eastern sovereign wealth funds have purchased landmark buildings in central London following a steady and sustained rise in crude prices. Morgan Stanley’s analysts, led by Bart Gysens, suggest that higher oil prices tend to lead to increased demand for top-tier commercial properties.
The Potential Impact on London’s Real Estate Market
Morgan Stanley analysts believe that prime real estate is often considered a reliable investment option to store wealth derived from commodities. Therefore, with higher oil prices, demand for prime real estate is expected to improve. The Bank of London and The Middle East, a financial services company, also predicts that investors from the Gulf Cooperation Council will invest $3.1 billion in the UK’s real estate sector by 2024, particularly in properties considered as “trophy assets”.
The Relationship Between Oil Prices and Commercial Property
Morgan Stanley cautions that the relationship between oil prices and commercial property may not hold true across all types of real estate. They emphasize that the potential for upside lies mainly within London’s priciest office buildings. The analysts add that while a higher oil price may provide some incremental improvement in risk-reward, it is important to consider other factors.
Morgan Stanley analysts have “overweight” ratings on both commercial real estate owners, Derwent London and Great Portland Estates. Despite overall skepticism towards UK exposure and the office sector, they believe that these companies present a compelling risk-reward opportunity due to their solid balance sheets and low stock prices. According to Morgan Stanley’s forecasts, they expect Derwent London stock to reach £27.00 ($33.43), a 45% increase from current levels, within 12 months. Similarly, shares of Great Portland Estates are projected to rise by 33% over the next year to £5.45.