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London’s West End offers security in the face of global uncertainty

The second quarter of the year saw investment activity in the West End reach £962 million, 24% ahead of the 10 year average, driven by expectations of future rental growth.

Despite an upturn in planning consents for new schemes, the space under construction over the next three years remains below the long term average, with completions in 2011 only half the trend level.

Cluttons reports that this under supply of space, which drove rental growth of 5.5% in the West End over the last quarter, is providing investors with greater security in the face of a very cautious, albeit strengthening, business environment in London, and growing concerns over a potential over-supply of office space in the City market.

Given this backdrop overseas investors remain active in the West End. In its West End market overview, Cluttons reports that buyer profiles remain broad based, although Canadian and Malaysian funds are currently leading the way amongst international buyers, all of whom are benefiting from the weak pound.

The knock on effect of improved confidence in the capital is reflected in the development pipeline. The second quarter witnessed a doubling in the amount of office space submitted for planning permission. Although this is currently speculative, Cluttons has predicted that a number of resi-conversions schemes will move forward over the coming year, as overseas investors look to enter the market on a joint venture basis.

‘London’s West End office market is showing continued strength as the capital maintains its economic outperformance. The tight supply pipeline is restricting options for occupiers and this dynamic will maintain rental growth. We expect strong investor demand for West End assets to be maintained despite the fragile financial climate,’ said John Wood, head of Clutton’s commercial division.

‘Going forward, the improved economic environment and consequent rental growth will inevitably stimulate further new developments. However the options available in the much sought-after prime core remain limited. Furthermore, stock losses to residential conversions are already being seen albeit at a slower pace than has been suggested,’ he added.