RCA Insights

London Office Market Strength Masks Some Frailties

By on December 17th, 2018

London’s office market appears to be strengthening in the final months before the U.K.’s exit from the European Union, according to a several data points recently released, offering positives amid a period of unprecedented political uncertainty. There is more to the London story, however.

Figures from the letting agents show take-up of Central London offices will be above average this year; headline rents in the City have held firm, with only a small drop in net-effective levels (headline rent less lease incentives); and, vacancy rates are below their long-term average. Moreover, firms such as Facebook are making long-term commitments to London through big pre-lets.

Real Capital Analytics data also shows some positive headline numbers. On the investment side, 2018 will be close to a record year for City offices, with more than £8.5 billion ($10.7 billion) completed or under contract.

London also continues to attract new waves of capital, this time from South Korean investors. This group will have spent over £3 billion by the end of 2018 – 10 times the amount they spent in 2017. To boot, Central London office pricing, as recorded by the RCA CPPI, has started to tick up again after a period of plateauing.

So far, so good: some resilience is evident. However, there are some risks and residual weaknesses. As the uncertainty lingers these are risks that may become more apparent in 2019, especially considering the some of the late-cycle, macro headwinds that real estate faces.

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–The number of traded properties in Central London is down at 2009 levels (see chart)

–London commercial prices have underperformed the regional U.K. markets and the other major European markets since June 2016

–Some of the biggest buyers this year have comparatively little experience of the market and they are buying at a point when the risks are the highest they have been since the Eurozone debt crisis

–The most experienced domestic and U.S. institutions have been net sellers

–The assumption that London will be OK whatever happens during the Brexit process is not borne out by the official forecasts made by the Treasury and the Bank of England

–Not all office take-up is equal, and the way serviced office firms like WeWork let space and then remarket it at a higher use density doesn’t reduce the amount of office space available to the end user

–The key technology, media and telecom sector employs a mobile, international work force and the (likely) ending of free movement between the U.K. and European peers will hamper this sector

It’s hard to reconcile the arguments of the pessimist and optimist camps when there is data to back up most viewpoints. It is clear London has remained attractive to a cadre of international investors and occupiers who have made the decision the market remains a long-term hold whatever happens. Even if the U.K. exits the E.U. without a deal, this might be the correct call. However, it is also clear that some investors are sitting on their hands and waiting for clarity before they return to London.

To learn more about the RCA CPPI (Commercial Property Price Indices) and to sign up for reports visit rcanalytics.com.  If you are an RCA client you can access RCA CPPI and Europe Capital Trends reports and conduct your own pricing analysis on the RCA website.

Tom Leahy

Tom Leahy

Senior Director, EMEA Analytics
tleahy@rcanalytics.com

Tom joined RCA in November 2014. In his role as Senior Director for the EMEA region, Tom is responsible for the development and expansion of the market analytics service for RCA’s European clients.

Prior to joining RCA, Tom was an Associate Director and then Head of Research at UK-based property consultancy, Lambert Smith Hampton. He started his career as an analyst at research consultancy Property Market Analysis (PMA).