During the past two years, the London commercial property market has performed strongly, ending on a high note in December 2015. However, and as expert analysts predicted, 2016 is set to bring about some qualitative changes into the capital’s commercial property market. Below you will find a detailed overview of how the market has fared during the first quarter of the year.
London Commercial Property Market Q1 2016: An Overview
Moderate rental growth has been the key theme emerging from the commercial real estate activity that has taken pace in London over the past quarter. Rents have remained relatively flat across all sub-markets (but especially so in the office sector) despite the rising interest rates. Investment activity also slowed down during Q1, and on this front average returns on commercial property were in the region of 7.5 per cent, slightly lower than 12 months ago. The slowdown has been evident in capital growth rates too, which averaged 2.9 per cent for central London offices, 4.1 per cent for retail properties, and 1.6 per cent for industrial space.
Another important theme that has emerged during the first quarter of this year relates to the impact that the so-called Brexit could have on a market where a large percentage of transactions are backed up by foreign investors. The vast majority of commercial property experts agree that commercial property prices would drop substantially should the UK leave the European Union. Britain’s exit could also result in a dramatic decline in the amount of foreign capital pouring into the London market. In fact, some market analysts affirm that European investors are already putting large-scale property purchases on hold – and may continue to do so until the vote takes place in June. Nevertheless, and until then, enquiries and demand for London properties should remain relatively strong, especially when compared to regional markets.
London Office Market Q1 2016
The latest data published by Colliers International show that during the first quarter of the year, transaction levels for office space in London went down, particularly in the West End and in the City. This could be attributed to the increasing shortage of Grade A office space, whose availability rates decreased by 23 per cent when compared to last year’s figures. At the time of writing, there were 11.9 million square feet available across the capital city, and approximately 4 per cent of that total consisted of office space under offer. Although on the whole activity levels were down, there were a few large transactions worth mentioning, including the purchase of an office building in the City, sold to a Hong Kong-based asset management firm for £220 million; the sale of the 15,714 square feet Bramah House building in Bermondsey; and the letting of approximately 87,000 square feet of office space at the Aldgate Tower.
According to researchers at CBRE, take up rates were also below the city’s ten-year average. Take up was slow in January, with just over 660,000 square feet absorbed, and went up by 17 per cent in February.
Increasingly tight supply has favoured the rise of average rental values across most sub-markets, although rent increases were moderate and the growth rates of prime rents showed a tendency towards flattening. For instance, there were no quarter-on-quarter changes in rental values in many West End markets, including St James’, Mayfair, Marylebone, Paddington, and Covent Garden. The same holds true for City sub-markets like Old Street, Clerkenwell, and Farringdon, and for properties in Midtown and the South Bank. The most notable increases in prime rent values affected office space in Victoria (£82.5 / sq ft, 6.5 per cent increase), Canary Wharf (£47.5 / sq ft, 5.6 per cent increase), and the eastern City fringe (£55 / sq ft, 4.8 per cent increase).
Retail & Industrial Markets Q1 2016
Demand for good-quality retail space remained relatively strong during the first three months of the year, mainly as a result of the ongoing growth of the online retail sector and to the expectation that the Crossrail project has generated among international investors and retailers. London’s West End was once again the strongest performer in a market that is clearly favourable to landlords. In this area, rental values rose by an average of 6 per cent during Q1.
Within the industrial market, demand for multi-let industrial space in London fringe areas and industrial estates located within the M25 was consolidated during Q1 2016. Prime rents were up from last year’s average, reaching £9 / sq ft in highly-sought after locations. This sub-market is expected to go from strength to strength during the remainder of the year.