4th Quarter – Commercial Property Market in London
As 2015 comes to an end, it’s time to sum up the key trends that have characterised the commercial property market in London over the past 12 months. The latest RICS UK Commercial Market Survey highlighted the growing demand experienced across all commercial property sectors, and in particular with regards to office and industrial properties. As expected, increased demand has resulted in higher prime rental values across all sectors. These averaged a 9.4 per cent increase in office rental prices, 7 per cent for retail stock, and just below 4 per cent for industrial properties (1).
The retail market benefited from exceptional levels of consumer confidence, which are at their highest since the late 90s. Annual change rates for retail rents in the West End averaged 14 per cent, whereas in the City they stayed at 4 per cent (2). Citywide, rental growth averaged 13.2 per cent. Vacancy rates dropped to 3 per cent, a figure that stands in stark contrast with this year’s national average at 14 per cent. Another key trend this year had to do with the performance of the industrial market, which experienced a boost as the e-commerce sector solidified its presence (3).
Office Market – Q4 2015
During the last quarter of 2015, the London office market has continued to display robust activity levels. At the beginning of Q4, year-to-date take up levels amounted to 9.7 million square feet, a figure that represents a 3 per cent increase over last year’s values. Most transactions involved firms involved in sectors like professional services, media and technology, and banking.
According to research data published by BNP Paribas, during November and December the main trends affecting the London office market were above-average leasing activity and a surge in investment levels. Vacancy rates dropped to 4.28 per cent in November, although this figure is likely to increase with the delivery of more than 7 million square feet of Grade A space over the course of 2016. Year-to-date take up rates reached 12.40 million square feet in early December (4).
On average, office rents in Central London rose by 2.3 per cent during Q4. A Cushman & Wakefield report revealed that prime rents had increased in 6 key areas, including Mayfair, where they reached average values of £125 / sq ft /year, Victoria (£80 / sq ft /year), Midtown (£65 / sq ft /year), Paddington (£62.5 / sq ft /year), the City Core (£66.50 / sq ft /year), and the outer City Core (£53.50 / sq ft /year). Take up levels have been particularly high in the City and the Docklands, where they have exceeded 2 million square feet (5). Another trend worth noting includes the increase in office refurbishment and fit-out activity (6).
As for the investment market, Q4 began with prime headline investment yields that ranged between 3.2 per cent for West End offices and 4.1 per cent for offices in the City. However, prime yields for office stock along the M25 remained stable at 5 per cent. Demand among investors was especially high for properties in the Victoria area, although key deals during this quarter involved office stock in the SW1, E14, EC1, and W1 postcodes (7).
Retail Market – Q4 2015
Although the retail market has been far from delivering a stellar performance, Q4 has been marked by positive growth indicators fuelled by a stronger economy and the proximity of the Christmas season. High street properties in London (and in particular in Bond Street, Mayfair, and Regent Street) have continued to benefit from strong demand, mainly coming from international retailers. However, it is important to note that prime retail yields have been marked by a downward trend, dropping to 2.25 and 4.50 per cent for properties in the West End and the City respectively (8)
The trajectory of the London retail property market becomes clearer when we put it into a broader context. During Q4 2015, prime shop rental values across London reached average values that were 50 per cent higher than in 2009. Moreover, the large influx of international high-end retailers has brought about a geographical expansion of the market, with sub-markets emerging in areas like Mount Street, Conduit Street and Dover Street (9).
Industrial Market – Q4 2015
Despite a notable decrease in the UK’s manufacturing output, demand for industrial properties is strong and supply is becoming increasingly limited. According to Cushman & Wakefield, investment yields for prime industrial properties averaged 4.8 per cent during Q4, and 4.1 per cent for large distribution centres. Rental values for logistics stock in and around Heathrow airport have increased to £13.50 / sq ft / year, whereas logistics units elsewhere in London averaged £11 / sq ft / year (10).
Sources:
(1) http://www.cushmanwakefield.com/~/media/reports/uk/UK%20Quarterly%20Marketbeat%20Dec%202015.pdf
(2) http://www.cushmanwakefield.com/~/media/reports/uk/UK%20Quarterly%20Marketbeat%20Dec%202015.pdf
(3) http://www.colliers.com/-/media/files/emea/uk/research/retail/201510-national-retail-barometer.pdf?la=en-GB
(4) https://www.realestate.bnpparibas.co.uk/upload/docs/application/pdf/2015-12/monthly_review_-_central_london_offices_-_dec_2015.pdf?id=cfo4_17223
(5) http://www.cushmanwakefield.com/~/media/reports/uk/UK%20Quarterly%20Marketbeat%20Dec%202015.pdf
(6) http://pdf.euro.savills.co.uk/uk/commercial—other/commercial-development-activity—december-2015.pdf
(7) http://pdf.euro.savills.co.uk/uk/commercial—other/uk-commercial-market-in-minutes—december-2015.pdf
(8) https://www.realestate.bnpparibas.co.uk/upload/docs/application/pdf/2015-11/central_london_office__retail_market_-_q3_2015_2_2015-11-26_10-35-0_231.pdf?myDate=1&endDay=&dateSince=124&dateSince_user=4&dateType=pdate&endYear=&cids=uat_20900&cids=uat_20707&types=ReCoResearch&beginMonth=&text=&wrkspc=cfo4_14568&searchResearch=true&endMonth=&dateSince_unit=2678400000&beginDay=&beginYear=&otherCountries=false&csrftoken=efUh4qXZtTihxa7o&id=cfo4_15005&hreflang=en #
(9) http://www.colliers.com/-/media/files/emea/uk/research/retail/201512centrallondonretailhealthcheck.pdf?la=en-GB
(10) http://www.cushmanwakefield.com/~/media/reports/uk/UK%20Quarterly%20Marketbeat%20Dec%202015.pdf