Commercial Property Values in Central London
Having accurate information at hand is one of the keys to making solid decisions. If you are considering breaking into the commercial property market in central London, having a clear picture of the trends that have affected this sector over the past ten years can be of invaluable help.
Generally speaking, the market in this part of London is characterised by rising activity levels, which have been prompted by a strong construction sector. All studies suggest that the market is slowly approaching pre-recession values. Ten years ago, commercial rental values in central London were growing at average annual rates that ranged between 4 and 5 per cent before they dipped substantially in 2009. The declining trend has been reverting itself, and OBR forecasts predict that between 2014 and 2017, rental values will stabilise and reach annual increases of 4 per cent. But there are other facts and figures that future investors and property managers need to bear in mind, so continue reading to find a detailed account of how the commercial property market in central London has performed over the past decade.
The Office Market
According to an IPD-GVA report, the office market in central London has nearly doubled its growth levels when compared to last year's figures. The report clearly shows that while in February 2013 growth rates barely reached 1 per cent, twelve months later this figure rose to 3.1 per cent. Following the reduced levels of activity that characterised the 2007-2009 period, a number of large second generation schemes began to be developed in central London starting in 2010. This led to the construction of office buildings in King's Cross, Canary Wharf/Riverside South, Waterloo, and Victoria.
The additional supply of new or refurbished office space (along with constant demand from occupiers) led to a steady increase in office rental values across central London. For example, in 2007 average costs per square foot were £32.80 for Grade A space and £24.50 in secondary locations. Prime rents in the City and the West End ranged between £45 and £50 per square feet, but by 2013 they had increased to £52.50 and £92.50 respectively. Nowadays, central London is known to have the most expensive office space in the world, with rental values on the higher end of the scale reaching £169 per square foot. The latest figures (August 2014) show that the highest rental values belong to properties located in St James's, Mayfair, Knightsbridge, Belgravia, Covent Garden, and Victoria.
The office investment market continues to be dominated by overseas investors, who are showing an increasing preference for medium-term leases. Average lease terms for central London offices have decreased over the past ten years, going down from 10.2 years to 7.6 years. Between 2004 and 2007, investment yields experienced a marked downward trend (from 8 per cent to 5 per cent). Investment yields have not yet gone back to pre-recession levels, and currently stand at 4.5 per cent.
More stock is being added to the development pipeline to cope with increasing demand. In 2013, 4.5 million square feet of office space were added to the city's total stock. It is expected that a further 9 million square feet will be completed by the end of 2014.
The general trend followed by the retail market in central London over the past decade can be summarised as follows: the market was buoyant between 2004 and 2007, when it began to stagnate due to decreasing disposable income, investor confidence, and footfall. There was evidence of robust growth starting in late 2012, especially in terms of rental values. Surveys have shown that costs per square foot have been steadily growing for the past three years, with the most expensive areas being Mayfair, St James, the northwestern side of Oxford Street, and SoHo. During the last quarter of 2013 average retail rents £107 per square foot. Market analysts have predicted that in 2015, rental values for prime retail space will exceed the £120 per square foot mark.
As in the case of the office market, the retail investment sector in central London has a strong presence of overseas investors, which now have a 57 per cent market share. Returns on investment decreased substantially between 2005 and 2007, dropping from 21.7 per cent to 9.7 per cent. Foreign investors began to take over the market in late 2011, helping reverse the plummeting transaction levels. More recently, retail expenditure and increased consumer confidence has helped boost investment yields on retail properties, which currently stand at 4.75 per cent for high street locations and at 5.75 per cent for shopping centres.
It is also worth mentioning the effects that e-tailing has had on the commercial property market. According to the Office for National Statistics, this sector has recently started to drive demand for warehouse space across central London, and total returns in this sector could amount to 14 per cent by the end of 2014.