The central London office market could see record double digit rental growth in 2010 as it benefits from a return of expansion-led occupier growth following an upswing in global trade and financial markets, according to analysts.
Consultants Knight Frank also said that the lack of speculative development would result in a sharp fall in availability in the next two years. Analysts expect that more institutional property funds will look to invest in 2010. It said that it anticipated that the rebound in property prices would be sustainable, as activity was consistent with past cycles and there was continued interest in London offices from sovereign wealth funds.
It forecast City of London prime rents to increase by 19% in 2010 to £52.50 per square foot, up from £44 per square foot in 2009, due to a shortage of high quality office space and revived tenant demand. Rents are forecast to rise to £67 per square foot by 2014, an increase of 52% over five years. ‘Due to the lack of new development starts across London in the last two years, supply will come sharply under pressure in the next two years. In fact, we are expecting a supply crunch in 2011, as an inadequate development pipeline collides with strong structural demand and tenants expanding in response to a stronger global economy,’ said Will Beardmore-Gray, head of City leasing at Knight Frank.
In the West End market it expects prime rents to see record growth of 11.5% in 2010 to £72.50 per square foot, up from £65 in 2009, mainly due to a limited pipeline of development schemes in core locations. It said that a rise in demand from specialist fund managers, such as hedge funds, is expected this year, following the recent recovery in financial markets. It added that in 2011, a similar supply crunch situation in the City appears likely as there is currently only 106,000 square feet of speculative space under construction for completion that year.
Meanwhile, UK commercial property values rose 0.9% in the typically quiet month of January, easing from record gains seen in each of the previous three months, according to the latest monthly index. It means that prices have now been rising steadily since July 2009, when they troughed after falling 44% from their peak in the middle of 2007, the CB Richard Ellis reports shows.
Central London offices saw the strongest performance over the month, with total returns, comprising rental income and capital growth, reaching 2.2%, about half of December’s 4.3% returns, CBRE said in a statement. By contrast, retail warehouses showed the most significant slowing in the rate of capital growth, with total returns up by 1.2%, their weakest monthly increase since June 2009. David Wylie, CBRE’s head of Economics and Forecasting, explained that average rental values for commercial properties, office, retail, and industrial, were down 0.1% over the month, a possible early indication that demand in occupier markets may be becoming more positive.