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Challenging year ahead for London office property market

The leasing markets across Central London are likely to be flat in 2012 but they expect rental growth to return across central London during 2013.
Neil Prime, head of office at Jones Lang LaSalle said that the supply gap in 2013 to 2016 is being exacerbated by the current economic environment. ‘This will provide opportunity for those who can speculatively develop or refurbish existing stock as when the occupational market returns choice will be limited and competition will increase driving rental returns,’ he explained.

His team also point out that London’s office market is not immune to short term volatility but will outperform both European and global competitor markets over the next five years.

Rental forecasts indicate strong growth by 2015, with prime office rents hitting £120 in the West End, a 20% increase, and £67.50 in the City, a 23% increase. But the path of rental growth has changed significantly with a weaker 2012 and a stronger 2013 and 2014 expected.

Low supply, pent up demand and structural events will provide key opportunities for development, refurbishments and re-gears over the next 24 months and growth in the TMT sector and lease events will be key catalysts for deals.

It is also predicted that investment will continue to be dominated by overseas capital, particularly sovereign wealth and far eastern capital, with other key buyers including US REITs, opportunity funds and Middle Eastern Institutions.

Key sellers will be German funds, UK funds and REITs, European Banks and NAMA over the next year.
‘London has been the most traded and liquid real estate market globally, with the lowest thresholds for entry. It is one of the most tax transparent markets and offers investors long leases, clear ownership structures and upward only rent reviews,’ said Damian Corbett, head of London Capital Markets at Jones Lang LaSalle.

‘Overseas capital will continue to dominate our markets in 2012 and we expect a significant increase in activity from the Far East. Over £1.6 billion in deals over £100 million in last 12 to15 months have emanated from this region already and with of the six of the 10 fastest growing millionaire populations in Asia we are confident that we will see further flows,’ he added.

Bill Page, head of EMEA office research believes that as the yield gap between the cost of debt, UK bonds and real estate is at a record year high, over the next three years the London office market will continue to be one of the most resilient global asset classes in a volatile and low return environment.

‘In the leasing market medium term jobs growth and structural events provide confidence that take-up volumes will recover from 2012 but we expect net absorption to be limited as companies occupy space more intensively,’ he said.