Analysis of the latest data and historic trends suggest prime London offices remain undervalued.
The pandemic and Brexit-related struggles of the London office market over the past year have been well documented. Workplace strategies remain uncertain, vacancy is above-average (although beginning to plateau), and investment activity has been slow to recover.
That said, there are plenty of reasons to be optimistic. COVID-19 Vaccines are working well, economic growth forecasts are being revised upwards, and there are promising signs of strong employment and investment growth in key sectors such as Tech. Survey data highlights a growing recognition of offices’ crucial role in fostering collaboration, productivity and innovation. Finally, the increasing importance of sustainability in corporate decision-making is fuelling demand for modern, energy-efficient office spaces.
Investors sense an opportunity. Volatile equity markets and low-yielding bonds have pushed more investors to consider real estate to meet their income requirements. Anecdotal evidence from bidding processes suggest a building weight of global capital sitting on the side-lines waiting to invest in London real estate. With a lack of available Grade A stock coming to market, this is putting considerable downward pressure on prime yields. Our prime London office yield series moved inwards 25 bps in Q2 to 3.25% and 3.75% for the West End and City markets respectively - the first time since 2016.
In this report, we have set out the key market forces currently driving investor demand and the hardening of prime London office yields, analysing how the city shows good value as it tentatively emerges into a post-Brexit, post-pandemic world.