London office market outlook points to stability ahead

21 November, 2018

Cluttons has released its outlook for Central London’s office market and predicts rents and capital values to end 2018 down around 6% on 2017.

Cluttons’ data shows that the 18 sub markets across the capital which it monitors have experienced declines in capital values, except for South Bank, where limited availability and a flurry of deals has helped to boost values over the last 12 months (see attached graphic). 

Faisal Durrani, Cluttons head of research explained, “The seemingly tumultuous political environment, combined with the threat of economic malaise for the UK at every step during the Brexit talks has stalled the market, with nervousness amongst buyers a common theme as they continue to shy away from committing to a purchase in a softening market”.

However, with some clarity expected around a Brexit deal pre-Christmas, the scale of the decline in rental and capital value should slow to -2% and -3% respectively in 2019.

In parallel, Cluttons also predicts that total returns are likely to slip from around 5% by the end of 2018 to around 1-15% next year.  This means that investors are likely to look beyond London and the South East to enjoy returns of closer to 9%.

Ralph Pearson, head of commercial agency, said: “The Central London office market presents a very mixed picture at present.  Headline rents and values are declining, particularly for mid-grade space, yet overall vacancy rates are at an all-time low and best in class developments are doing well in terms of rental growth and high pre-letting commitments. We expect a much more stable picture post-Brexit.”

Faisal Durrani, head of research, commented: “It has been an uneasy spell for the Central London market.  However, despite this, it has enjoyed unrelenting international investment, attracting £3.6 billion in Q3, up from £3.3 billion in Q2, with investors potentially sensing a good deal prior to the conclusion of Brexit negotiations. Even German institutional investors have stepped back into the market, committing nearly £600 million in Q3; the highest level in 18 months and the second highest quarterly investment volume recorded in five years.”