London Offices: Above trend take-up, investment rebound & sharpening focus on the EPC deadline
Strong growth in the London economy will underpin above trend levels of take-up, an erosion of excess availability and prime rents rising in most submarkets.
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We expect the core City and West End submarkets to be the strongest performers next year with prime rental growth of 5% in the latter and 6% in the former as the availability of best-in-class space is especially limited. Larger occupiers now have ESG embedded in their corporate DNA, so will be looking to their real estate portfolios to help achieve and portray these aspirations. Demand from larger corporates will be driven to new best-in-class space so we should see a greater number of pre-lets at rental levels that are well ahead of the market.
We also expect to see much stronger levels of take-up from smaller occupiers next year – start-ups and SMEs. They will be attracted to better quality secondhand space that is well located, amenity rich, and where the landlord is making efforts to improve the ongoing operational efficiency.
Central London’s local authorities will also play an important role as they seek to raise employment within their boroughs, for example by capitalising on the presence of high-quality educational institutions. They will look to support the re-development/re-purposing of obsolete space that can attract occupiers from growth sectors like tech, life sciences and education.
Our recently released Active Capital Report highlights the UK to be one of the main locations for record levels of cross border capital flows and accordingly we expect London to be a significant beneficiary. We predict a strong rise in office investment transactions next year, driving yield compression for the very best buildings with long leases and high-quality tenants. The yield spread with other European offices will narrow.
We should see valuers beginning to push yields out on buildings that do not meet the 2030 target of EPC B on lettable buildings. Of these, those that are well-located will appeal to value-add investors, who will point to improving market expectations for future rental growth as the rationale to underwrite redevelopment and letting risk. Moreover, greater levels of planning authority scrutiny will be applied to new builds in order to reduce embodied carbon emissions further constraining the longer-term development pipeline at a time when structural demand for the highest quality buildings is rising.