Institutions with £5bn to spend eye London offices
Making sense of the latest trends in property and economics from around the globe
4 minutes to read
Large companies on the hunt for a prime London office face a dwindling number of options.
In the City Core, the capital's largest submarket, there are just six available prime buildings larger than 40,000 square feet (sq ft). Only two are larger than 100,000 sq ft. These shortages are replicated across the various submarkets to a greater or lesser degree; prime availability totals 6.7m sq ft, which equates to a vacancy rate of 2.6%.
I'm taking these figures from Knight Frank global head of occupier research Lee Elliott, who published an exhaustive overview of the capital's supply and demand dynamics to coincide with our annual London Breakfast, held at Portman Square’s Nobu Hotel on Tuesday. Lee's report includes an update as to how we define 'prime'; namely the very best quality buildings in the very best locations (you can find a more complete definition in the PDF linked above).
The supply picture for offices that sit outside our definition of prime looks quite different: there was 9.3m sq ft of grade B and C space available at the end of 2024.
Outstripping completions
Developers would respond to meet this need in benign conditions, but it takes time and conditions have been anything but benign. Uncertainty as to how working habits would settle, economic volatility and high borrowing and construction costs have all coalesced to weigh on development activity.
At the end of 2024, annual take-up of better-quality space outstripped completions by nearly 2.4m sq ft. Speculative space currently under construction and due to complete by 2028 totals 11.9m sq ft, but only 7.6m sq ft meets our updated definition of prime. Moreover, the current pipeline of prime and grade A space falls well below average levels of new and refurbished take-up. By 2028, this implies a potential shortfall of almost 8m sq ft.
Many occupiers recognise the severity of the situation and are committing far earlier than they normally would. Schemes under construction are achieving lettings on average 14 months ahead of completion, rising to 28 months prior for office units exceeding 100,000 sq ft.
The shortfall hasn’t gone unnoticed by the global investment community either, Knight Frank's head of London offices Philip Hobley wrote in City AM yesterday. We have identified £5bn of institutional investment requirements looking to invest in core London office properties in 2025.
A growing problem
The government has so far taken a sensible approach in its quest to build 1.5 million homes this parliament. Mandatory housing targets and relaxed greenbelt rules have been welcomed by the sector.
However, there are other barriers that will be more complex to overcome, according to the results of our latest survey of 50 volume and SME housebuilders. Almost all of our respondents believe the government will fail to meet its annual target of 300,000 homes this year. Looking ahead, about 40% of housebuilders expect the sector will deliver 200,000 homes, while a third predict 150,000, and 14% foresee less than 150,000 homes.
The pressure on housing associations presents a growing problem, which is causing delays for developers. Many are nearing their borrowing limits and are unable to raise new equity as not-for-profit entities. The costs of decarbonising their existing stock and addressing fire safety remediation are further straining their capacity to build new homes, and many have scaled back their development programs, focusing instead on their existing properties.
“Housing associations once played a crucial role in supply but now struggle to deliver high volumes, causing delays for developers,” Knight Frank's Anna Ward tells Bloomberg. The impact of Labour’s housebuilding push “will be limited unless financial constraints on housing associations are addressed,” she added.
A dose of confidence
Last week's Bank of England decision made for confusing reading. Inflation is likely to hit 3.7% in the third quarter of the year due to increases in energy bills, yet every member voted to cut the base rate - two wanted to cut by 50 bps.
Catherine Mann, previously one of the most hawkish members of the Monetary Policy Committee, explained her decision to vote for a 50 bps cut during a speech at Leeds Beckett University this week. The coming spike in inflation is a one-off that won't lead to second round effects, and a more sustained, benign outlook for inflation “allowed me to look through the inflation hump," she said. That's fine, but the MPC also opted against factoring a global trade war into its forecasts - voting for a bumper cut without knowing how that will play out seems bold.
Swap rates haven't really moved, but it looks like the decision has injected a dose of confidence among the mortgage lenders. Santander will introduce two- and five-year fixed rates below 4% this week. Barclays will also introduce a five-year fix below 4%. Coventry has also announced a string of rate cuts this morning.
That will bolster the growing sense of stability in the housing market - see Tom Bill's piece from Monday for more on that.
In other news...
Rachel Reeves may be forced to raise taxes (Times).