by Adam Cornbloom
London Office Market
Despite soft economic growth and continued uncertainty over Brexit, leasing activity in London remained strong in Q3 2019.
Occupancy at the end of September stood at 94.3% in the City, which is above the long-term average. This reflects the overall growth in rentals seen across the City in 2019. Savills report average rents of Grade A space in the City have risen by 5.6% to £65.22 per square foot in the year to date. Limited new supply in the West End has seen average Grade A rents rise by 10% from Q3 2018 to £82.57 per square foot.
The serviced office sector has accounted for the greatest share of new lettings in the City, despite concerns over the sustainability of market leader WeWork. On that note, Savills have commented that in a worst-case scenario of WeWork failing and the entirety of their stock returning to the market they believe there is sufficient demand for office space to absorb this shock.
Despite uncertainty over its future, WeWork had 280,000 square feet of space under offer in the West End as at October 2019.
There is confidence in continued demand for office space in the capital. Oxford Economics recently forecast 182,000 new office-based jobs to be created in London during the next 5 years.
House prices grew nationwide by 1.3% in the year to August 2019 and have remained unchanged over the last 3 months to November according to Nationwide. A less encouraging picture continues to be painted in London where prices fell by 1.4% in the year to August. Prime London prices are down 12.3% on the last 5 years. Is this all down to Brexit? Savills highlight that the current trends correspond with the usual housing market cycle seen in the last 15 years. Prices in London will usually accelerate faster than the remainder of the country until they reach the affordability limit and then fall back, whilst the rest of the country catches up with London's early gains for another 2 to 3 years.
That being said, Savills forecast modest average annual growth across the UK of 2.7% for the next 5 years, compared with average annual increases of 6.5% over the last 10 years.
Prime London residential rents have risen in Q3 for the first time since 2016, growing by an average of 0.9%. However, the rest of the London rental market has generally not seen growth in the last year and rents are down on the last 5 years. This is likely due to increases in supply arising from landlords holding properties until the market steadies post-Brexit. The London rental market will likely continue to strengthen over the next few years as sales pick up and tenant demand continues to grow.
Development - Build to Rent Sector Growing
Institutional investors are appearing to look with increasing confidence at the 'build to rent' sector for secure long-term investments, and supply of build to rent homes across the UK has grown by 20% since Q3 2018. The average size of schemes has also increased, now averaging 133 units. The average size of schemes currently under construction is 245 units. Construction of 1,400 units has commenced in Q3 2019 alone.
The number of London homes in planning increased by 26% in the year to Q3, and 20% in the remainder of the country. This amounts to 77,000 units under construction across the country with 40,000 in London.
For further advice, or to discuss your transactions generally, please contact Adam Cornbloom.
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