Overview of London’s Commercial Property Market – 1st Quarter 2014

So far, 2014 has had a promising start in terms of the overall health of the UK’s real estate market. According to the most recent indicators, the British economy is experiencing its strongest growth levels since 2007, and this has undoubtedly had a positive knock-on effect in the UK’s real estate market. Take a look at the key trends and figures that have marked the commercial property market in London during the first quarter of the year.

The London office market: key facts and figures

During the first quarter of 2014, the predominant theme in the London office property market has been increased investment activity and the investors’ willingness to take on bigger risks and to get involved in larger transactions. This trend has been mostly evident in the geographical expansion of the office market within and beyond the city’s boundaries. In previous quarters, activity in the office market concentrated around the Central London area. However, during the first quarter of the year, occupiers and investors have shown an increasingly strong preference for out-of-town offices (whose yields have increased to 4 per cent) and for properties in the Thames Valley area, whose current investment yields average 6 per cent. Nevertheless, office space located in the city’s West End commands the highest investment yield values at an average of nearly 8 per cent, followed by City office floor space, which is currently yielding returns of 6 per cent.

The key role played last year by the technology, media, and communications sector in the growth of the London office market has continued to be evident during the first quarter of 2014. Analysts at Deloitte affirm that during the remainder of the year, the TMT sector will continue to be the most important source of demand in the capital’s office market. Likewise, analysts have noticed increased demand for office space from banking and financial companies, whose requirements for additional floor space seem to be back on track thanks to the generalised optimistic outlook of the British economy.

Another highlight of this quarter involves the drop in office vacancy rates, which currently stand at 6.8 per cent. This figure is a clear improvement over the long-term average for the city, which has been close to 8 per cent for the past five years. In Central London and the West End, class A prime office rents average £120 per square foot. Last year ended with average rental values of £110, but during the first quarter of 2014 rising demand has resulted in significant price increases.

Outside the West End, leasing activity has been particularly buoyant in areas like King’s Cross, Euston, Paddington, Midtown, Victoria, Mayfair, and the area north of Oxford Street. In fact, some of this sub-markets have experienced year-on-year rental growth values of up to 26 per cent.

Overall, during the first three months of 2014, the most obvious trends in the office property market have been strengthened occupier activity, increased rental values, and stronger investor activity.

Highlights of the retail property market

After several consecutive quarters of unchanged vacancy rates, the high street vacancy levels have finally started to go down. Market analysts have been predicting a revival of the high street for months, and it seems that their forecasts have finally begun to come true during the first quarter of 2014. Decreased retail vacancy rates have occurred despite the growing popularity of online shopping. In fact, this new shopping channel has proven to be a key factor in the expansion of the retail property market in London, as hundreds of high street properties are being used as click-and-collect points.

As in the case of the office market, occupiers and investors in the retail property sector have started to broaden their horizons by looking at suitable properties outside Central London. This has resulted in increased rental values in areas like Edgware Road, Piccadilly, and Albemarle Street, in Mayfair.

Average investment yields for headline retail properties are in the region of 6 per cent, with food stores yielding the highest returns and shopping centres the lowest. Rent values have continued their upward trend in prime locations, as properties in Bond Street have seen rent increases of 25 per cent, and rental prices in Oxford Street and Regent Street have gone up by 3.3 and 4 per cent in each case.

Industrial property

The industrial property market has also experienced a shift in demand over the last quarter. Given the limited supply of prime industrial floor space, investors have started to show interest in secondary units near large industrial hubs in Greater London, mainly in or around Romford, Croydon, and Heathrow.

However, the current demand has not been strong enough to cause a rise in prime rental growth levels in this market sub-sector, as these values have remained pretty much stable since 2011. Currently, supermarkets, courier companies, and online retailers are the key drivers of the industrial property market in the British capital.

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