Investment in the central London office property market has surged this year, rents remain stable and the extreme risk to Brexit related jobs is overstated, according to a new analysis.
Overall, up to the end of September investment into London offices reached £12.5 billion, the strongest first nine months on record, and up 44% on the same point in 2016, the report from global property consultants JLL shows.
By the end of the year central London office investment volumes are predicted to hit £18 billion which will make it one of the highest ever years and prime yields and capital values have remained stable with London yields the highest of all global gateway cities.
The report points out that while there is continuing uncertainty about the flow of financial services jobs out of London, the extreme downside risk to Brexit related jobs is overstated.
It explains that previously office rents rising at too fast a rate have set up the conditions for a market correction, this hasn’t been happening. Rents have been stable the last two years and once longer rent free periods has been factored in, rents in real terms have already undergone a mild correction.
It also points out that there isn’t the aggressive oversupply of office space witnessed before previous corrections. Vacancy remains low and the likely delivery of office space due onto the market from 2018 to 2020 is modest.
Indeed, there is only 12.1 million square feet in the development pipeline for 2018 to 2020, of which 44% is already pre-let, compared to 35 million square feet back in 1990 to 1992.
And it says that wider office take up remains positive with 11.3 million square feet being taken up in the last 12 months beating the 10 year average of 9.9 million square feet while vacancy remains at 5% below the 10 year average
‘Amidst all the Brexit noise, negative political sentiment and pessimistic forecasts, there is some uncertainty but central London office property market fundamentals remain sound in terms of supply,’ said Neil Prime, head of central London markets at JLL.
‘We are seeing new sources of occupier demand from life sciences and sustained activity from the TMT sector which will offset financial sector weakness. London remains attractive to global capital and the flood of money from Hong Kong has not slowed. Nearly £1 of every £2 invested in London offices is from Hong Kong and this is unlikely to change in the short term. The weak pound will maintain the currency arbitrage play,’ he added.
‘In the current environment, the market looks stable and whilst unlikely to deliver widespread growth, an increase in office rents is forecast to return from 2019. Office occupiers will seek flexibility, employees will seek the best places and location and asset choice selection will be key to investor performance,’ he concluded.
Source: Property Wire