Demand for office space in London is rising faster than anticipated, pushing rents upwards despite a challenging economic climate, financial sector relocations, and the continued trend of remote work.
According to Real I.S. Research, this resilience is driven by a surge in interest for high-quality, modern office space. Landlords are quickly adapting buildings to meet these evolving tenant needs. Some companies are even choosing to relocate, while prestigious firms like HSBC are moving back to the City centre from suburbs like Docklands.
Proximity to excellent public transportation and vibrant amenities like cafes and restaurants are key factors influencing these relocations. While these moves often involve downsizing and higher rents, companies aim to create a more attractive work environment and boost employee office attendance.
Marco Kramer, head of Research and Investment Strategy at Real I.S. AG, commented: ‘London offers comparatively resilient rental markets for office real estate in the top segment and also high initial yields, in historical terms, in the investment market. This great global city on the Thames is therefore definitely back on the list of target markets for investors.’
Just like in many European cities, London's office market is experiencing a growing quality gap between modern and outdated buildings. This is evident in leasing activity, vacancy rates, and rental prices. Prime office rents in the City and West End/Midtown submarkets have skyrocketed by 15% and 24% respectively since late 2019, significantly outperforming average central London rents.
Investor activity in London's office property market remains tepid, except for strong participation from Asian buyers. While transaction volume has been low so far, there are reasons to believe 2024 could see increased market activity. A significant volume of office real estate loans are coming up for refinancing this year. Capital market interest rates, which influence loan rates, have risen sharply in recent years. Additionally, property values have dipped due to market corrections. This combination could lead to distressed sales of properties that can no longer generate sufficient returns to cover high borrowing costs.
Added to the appeal are attractive property yields. Prime office properties in the City currently offer starting yields of 5-6%, while those in the West End/Midtown submarket start at 4-5%.
‘These are the highest yields since 2010, so many investors see opportunities to enter the London office market in the coming months,’ added Kramer.
