London office rents may be high – but there’s still plenty of fuel in the tank for growth as businesses look outside the centre
Central London’s property market has been booming now for half a decade. Values and rents for the capital’s offices have risen steadily, by 88 per cent and 44 per cent respectively between April 2010 and January 2016, and those investing in the market have enjoyed total returns of 140 per cent over the same period.
As ever, many will look to London’s golden performance as a sign of an impending fall, but it’s too early to call time on London’s prospects; for those looking in the right places, the capital still has plenty of fuel in the tank.
London’s success since the recession has primarily been underpinned by a groundswell of demand. The economic recovery and rising business confidence have driven up rents and capital investment, and demand has grown at such a rate that the supply pipeline has struggled to keep pace.
This supply shortage has helped buoy price and rent growth across both residential and commercial property markets, but it would be short-sighted to expect this to support the market forever; the development response is now well and truly on its way.
There was 12.7m sq ft of office space under construction across central London at the end of 2015, the highest level in the current cycle. This is a significant amount of stock entering the market, but demand remains high enough to easily absorb this.
Indeed, 2015 was a record year for commercial land sales. Some £960m of land sales completed in the fourth quarter, bringing the year-end total to £5.4bn; well above the 2007 record of £4.7bn. Nevertheless, as the development response kicks in, some are asking how sustainable this demand really is.
The answer lies in demographic and infrastructure changes. The capital’s population is rising rapidly, expected to hit 10m by 2030, and a spate of major infrastructure improvements, including Crossrail 1 and the Thameslink and Northern Line extensions are opening up communities right across London's emerging neighbourhoods.
Businesses are also increasingly footloose, and for the 250,000 new companies with under 50 employees in London since 2010, the suburbs are as much a prospect as the core. This popularity is registering for investors as well, especially the international investors that accounted for 78 per cent of land sales volumes in the fourth quarter last year.
Central London’s boundaries mean less and less each day. History tells us when one type of development, whether it be commercial, residential or retail, leads the regeneration of an area, the others are not far behind.
The traditional borders of Central London are starting to melt away, and this spread of activity across the capital is providing a healthy diversification which is both good for the market and hints at a sustainable growth in future. It’s time we start looking at London as the unified and connected city it is.