London City to benefit first from development finance revival: Savills

London's City office market could be the first to benefit from a move by lenders towards commercial development finance as a lack of new stock is forecast to trigger a potential 8.6% annual rental growth over the next five years, according to real estate adviser Savills. The firm said that the re-emergence of residential development lending could see financiers turn to commercial development finance.

Savills said that only 11 office schemes in London City are set to complete over the next four years, totalling 133,776 m2, of which 92,424 m² is committed by prelets. Furthermore, this figure represents 74,320 m² of new supply per annum over the next four years against a long-term average of 287,990 m² per annum.

William Newsom, UK head of Savills valuation, said: 'In the 1990s the development finance markets were closed for half a dozen years. In this cycle we have seen markets reopen again after only two years, albeit on cautious terms and predominately for residential stock. Traditionally commercial development finance follows the residential markets and the prospect of kick-starting these developments is extremely encouraging for areas that look set to experience a shortage of quality supply. We are already hearing lenders say that they will lend against prelet commercial development. I believe it is only a matter of time before we see such deals closed.'

Peter Thursfield, director of Savills City agency, added: 'We are seeing clear signs of recovery in the City market this year. Vacancy rates have already fallen and office rents have risen by about 10% over the last six months. An increase in debt finance for quality developments will be welcomed in the medium to long term.'