Grosvenor tips London office recovery in 2010

Grosvenor Fund Management has predicted a sharp recovery in London office returns starting in 2010 and generating 12-13% per annum returns over five years. This follows capital value declines in excess of 45% since mid-2007. Rents are expected to increase by about 60% from their trough through 2011-2016, Grosvenor said. Supply is expected to be very constrained: 2009-2013 will see the lowest level of new offices delivered in London's West End and the City since records began in 1986.

Scott Rowland, fund manager for Grosvenor’s London Office Fund commented: 'Yields have reached all-time highs in real terms and despite the current weak occupational market, London offices are attractively priced. Investors are already returning to the market and yields are starting to fall. However, asset-specific returns can vary widely and investors need strong property expertise and a comprehensive knowledge of the market to adequately appraise risk and select the best stock.'

Grosvenor said the London office market has historically performed very strongly in the recovery periods of economic cycles and is extremely responsive to changes in the international economic environment and global capital markets. In its analysis note, Grosvenor contended that performance could even exceed returns seen in the 1990s recovery for a number of reasons. These are that there is comparatively less excess supply. New office development is expected to total just 910,000 m² from 2009-2013, significantly below the long-run five-year average of 1.5 million m² to 2009.

In addition, current rapid improvements in some demand indicators are leading to increased forecasts of take-up from occupiers. London now has a larger market share of and more diversified exposure to the global financial and business services sector.