London commercial property sees first growth since 2007, new research shows
The strength of London’s economy has led to a recovery in commercial property rental values nine months earlier than expected but the outlook for the retail market is poor, according to a new report.
Capital values has risen by 11% since July 2009, the first growth for two and a half years but it is still some 38% below June 2007, the latest Commercial Property Market Outlook report from Cluttons shows.
Although the signs are welcome, analysts are warning against unfounded optimism. ‘Current buying activity is being fuelled by increased allocations to property by both institutions and private investors. However, it is strong occupier demand that leads to sustainable rental growth, which is really the motor of long term property performance. The sharp recovery in prices over the past six months should not ignore the underlying fragility of most occupier markets,’ said John Barrett, partner and head of valuation and investment.
The report shows that improved confidence has led to more occupier deals in the City and West End of London over the last quarter, leading to a recovery in rents. In the City rents have recovered to £49 per square foot from £42.50 per square foot in the third quarter of 2009.
In the West End, prime rents have remained unchanged at £75 per square foot although take-up has improved. Yields have also fallen to 5% or below in some cases due to demand for good stock in central London.
But yields across the regions have fallen by around 25 basis points, despite falling prime rents in city centres of between 5% and 10% on average, the report also shows.
In the retail sector, the outlook remains bleak. While 2009 was not as bad as expected, 2010 is likely to be more difficult as 10% of shops are empty in the UK and this number is likely to rise.
In the industrial sector, property demand is still weak and headline rents fell by around 5% last year. However a lack of speculative development means rents may grow from 2012, the report points out.
‘While the first quarter of 2010 has been positive, fears of a moderate dip and weak occupier demand are casting doubt over property’s continuing recovery for all but the very best stock. The ongoing uncertainty surrounding the General Election and perceived post Election austerity cuts continues to cast a shadow over all sectors of the market,’ explained Barrett.
‘While doubts remain, we expect investors to revert to the fundamentals, which will no doubt have a further polarizing effect on an already disconnected marker,’ he added.