City broker: Stocks have got the office cycle wrong
City broker Panmure Liberum has said that listed commercial office firms are undervalued on London’s stock market given the rapid rise in rents in the capital.
Commercial office leaser Great Portland Estates (GPE) has fallen nearly 60 per cent from its 2020 peak and significantly underperformed the FTSE 250 this year – but Panmure said that the stock is “very attractive”.
“At 308p the shares are getting [market conditions] wrong and we see an excellent opportunity,” analysts said.
Rents in the capital have been under pressure since employees began to return to offices as the pandemic eased.
A combination of this tight supply, plus a flight to quality, rising costs for landlords and a construction slowdown has created a genuine surge in prices: GPE has seen rental growth of 12.5 per cent annually over the last three years.
“London prime office rents are doubling faster than expected… [in] more evidence of our thesis that London office rents are to double versus 2021 levels,” analysts said.
“This is now evident and incontrovertible, and if anything happening faster than expected, and the new question is: for core prime new build space, how high can rents go?”
Knight Frank has projected an undersupply of five to seven million sq ft of prime space by 2028, with a similar imbalance expected to continue into 2029 and beyond.
“There is practically no space in the West End comparable to 30 Duke Street… Demand has ‘collapsed’ from peripheral markets into the core W1 and EC2 markets, with the best locations for commuting and the best buildings seeing the most pricing tension,” Panmure said.
Last month, Derwent said that “demand [is] well above the long-term average and [there’s] a significant supply shortage at the top end”.
Supply of the “right space” is constrained, Derwent added, with businesses focused on “high quality, well-designed buildings with best-in-class amenity and sustainability credentials”.