Research (Professional Only)
When will Central London offices rent peak?
10 September 2015
Central London offices have recently been the star performer of the UK commercial real estate market. Total returns on City and West End offices averaged 14.2% per annum and 16.1% per annum respectively over the five years to June 2015 (source: MSCI), well above the all property average of 10.1% per annum. While part of this outperformance was due to a relatively favourable fall in yields, this re-rating was supported by a big upswing in rents, reflecting both strong employment growth and low levels of new office building. Average grade office rents in the City and Mayfair have risen by 50–60% from their trough in early 2010 (source: Co-Star /PPR) and certain areas such as Shoreditch and the South Bank have seen even faster growth, as they have graduated from fringe locations into integral parts of the Central London market. Given that property yields appear unlikely to fall much further, assuming that interest rates start rising in 2016, the key question now for investors is when will Central London office rents peak?
That Central London office rents are now above their previous peak may leave some investors feeling queasy, but the 2008 peak is an arbitrary level rather than an important milestone (see Chart 1). Looking forward, what really matters are the future demand and supply forces shaping the occupier market. On the demand side, Oxford Economics forecasts that office employment (defined as administrative services, financial services, IT and communication, professional services, public administration and real estate) in Central and Inner London will increase by 12%, or 200,000 people, between 2014 and 2019 (see Chart 2). Encouragingly, this expansion should be based on a range of diverse sectors, as London continues to develop as an international hub for IT, media and professional services (e.g. accountancy, architecture, law and scientific research). By contrast, employment in financial services is likely to be flat and cuts in government spending mean that jobs in public administration are expected to decline.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.