London office market outlook - Q2 2019

RENTS RISE ACROSS THE BOARD 

Rents across London have remained unchanged for the better part of three years, however with the supply dearth becoming ever more acute, prime headline rents have risen across the board, with the West End (£107 per sq ft), the City (£72.50 per sq ft) and the Docklands (£49.50 per sq ft) all registering growth of 2%, 4% and 5%, respectively during Q2. These increases have been exacerbated by robust demand levels from occupiers, despite the uncertainty around Brexit. 

To put this into context, 50% of all space under construction is currently prelet and this figure rises to 68% in the West End. 

Occupiers are being driven by the quality of space on offer and to an extent are location agnostic, but there are those who will pay a premium to secure space in a specific location. Overall, we expect rental growth to be the strongest in Southbank, the City Core and Canary Wharf, with all three markets likely to see rents rise by over 17% in the five year period ending 2023. 

Stronger than expected economic growth since the referendum, coupled with robust job creation levels in London’s tech, professional and finance and banking sectors are helping to underpin demand, with most occupiers seemingly keen to ‘get on with life’, irrespective of how Brexit concludes. 

Inflation however, could expand by between 12-15% over the same period, making the growth in these locations seem less exceptional. Nevertheless, we are forecasting these markets to experience a period of real rental growth.

CANARY WHARF SET TO SHINE? 

In our supply starved environment, we are currently tracking 26 requirements for over 100,000 sq ft; however there are just 14 schemes in London that can service this. The West End has none and the Docklands contain nine; five of which are in Canary Wharf. This availability in Canary Wharf, combined with an expected positive boost arising from the completion of the Elizabeth Line, plus the fact that net job creation rates in London’s technology and finance sectors are expected to underpin demand for space in the short to medium term – core pillars of demand for Canary Wharf. 

This means that we expect the area to be amongst the strongest rental performers in the London market over the next five years. Furthermore, with rents still hovering just shy of £50 per sq ft, they do offer relatively good value, when compared to locations in the West End and the City. 

The Elizabeth Line’s impact will be to bring Canary Wharf ‘closer’ to other markets due to quicker transport links, which may well provide the impetus for occupiers to continue to look more favourably at this market. 

OCCUPANCY COSTS TO CURB WEST END ENTHUSIASM? 

Elsewhere, in the West End, rising Business Rates, as detailed in our Q1 Central London Quarterly report, may start to temper the attractiveness of the area to some, as occupancy costs rise. 

This could curtail rental value growth to an extent. With a lack of stock and occupiers being driven eastward towards the City due to better availability and indeed, pricing, the question possibly needs to be raised?

INVESTMENT VOLUMES REMAIN SUBDUED OVER H1 

The spectre of Brexit has prompted a strategy of ‘wait and see’ for some investors over H1 2019, contributing to lower investment volumes. However, London remains one of the largest, liquid and most transparent markets globally and ranks third globally for cross-border office volumes in Q2, according to RCA. 

Yields in Central London also remain attractive compared to many other European prime markets, albeit there has been a certain lack of appropriate stock for purchase. For those investors waiting on the sidelines for more political certainty, clarity around a Brexit resolution could pull yields back from 3.75% and 4.50% for the West End and City respectively. In the interim, while activity has seen a dampening, there have been no forced or distressed sales. 

Looking forward, we are seeing an increase in enquiries from cross-border investors, many of whom are facing their own domestic geopolitical considerations.