Overview of London’s Commercial Property Market – 4th Quarter 2013

Latest trends in the London office property market

According to an October 2013 report published by Jones Lang Lasalle, the main characteristic of the London office market during the last quarter of the year has been accelerated rental growth. This has been especially evident in London’s West End and in the City. Prime office rental values in the West End and in the City evidence a quarter-on-quarter increase of nearly 4 per cent. This means that the London office market is now among the top five most expensive in Europe.

Quarter-on-quarter surveys show that the highest increase in rental values has taken place in properties located in Mayfair and St James’, where prices have reached £110 per square foot. Other significant increases have been observed in Soho, Covent Garden, Victoria, Noho, and Fitzrovia. The areas that have experienced the least dramatic increases are Shoreditch, Old Street, Canary Wharf, and Camden.

The largest transaction during this quarter involved a 430,000 square feet property near London Bridge.

The retail property market in London, Q4 2013

The London retail property market has bucked the nationwide trend during this quarter, as it has been characterised by rental growth and low vacancy rates. When compared to the fourth quarter of 2012, retail rental values are 5.7 per cent up.

Investment yields in prime locations have increased by 4.75 per cent, whereas in secondary locations they have grown by 6.25 per cent. However, during the fourth quarter of the year, rental value growth levels for retail floor space has decreased by 0.6 per cent.

The industrial property market in London

Demand for industrial floor space is closely linked to the performance of the manufacturing sector. According to the latest CIPS Confidence Survey (carried out in July 2013), a slightly stronger manufacturing sector is thought to bring some degree of expansion into the industrial property market in the British capital in the coming months.

Surveys carried out by GVA also show that during this quarter, the average rental values for warehouses have decreased by 0.6 per cent, although the forecasts for 2014 affirm that prices in this sector will experience average growth levels of 1 per cent.

Summarising the year: An overview of the commercial property market in London during 2013

During 2013, the London market has mirrored the trends seen in this sector at European level, where signs of recovery have been more evident from the second quarter of the year onwards. In overall terms, and when compared to other regional markets, the London commercial property market is among those that have fared best during 2013, as there have been signs of activity evident across all sub-markets.

Prime rental values for office properties increased by an average of 2.6 per cent across London. This is the result of a reduced pool of good quality floor space and healthy levels of occupier demand. Demand in the London office market is expected to remain strong for the rest of the year. Overall, take up rates during the first three quarters of the year have already exceeded the rates for 2011 and 2012 by a total of 16 per cent. As the supply of highly sought-after inner city Grade A space decreases, second hand floor space will be relased, contributing to increased take up rates throughout 2014 too.

Office vacancy rates have been slowly decreasing during 2013, in line with the national trend. Rental growth in the City was up by 4.3 per cent, whereas in the West End rental growth values have skyrocketed reaching values of nearly 6.5 per cent. Lower rental growth values have been evident in office properties in suburban London and within the M25 ring area.

The number of investment transactions concerning office properties in London has decreased by 10 per cent when compared to last year. Whereas this year primary yields have fallen to nearly 6 per cent, secondary yields have increased to 15.2 per cent, a value that is nearly 3 per cent higher than last year. In terms of investment returns, the highest values belong to retail properties in the West End, where they have reached 13 per cent. Next are West End office properties with 12 per cent, followed by City offices with just under 10 per cent. The forecasts predict that retail investment returns will overtake office values within the next 2 years, and that returns for industrial properties will peak at 11.4 per cent in 2014.

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