Capital Economics: London office completions to reduce

The rise in office space under construction reported by the summer London Crane Survey highlighted that developers continue to have confidence in the market, however, other surveys of construction and development suggest that space under construction is unlikely to increase further, warns Capital Economics.

The summer 2019 Crane Survey suggests that developers were not dissuaded from investing in London, despite heightened uncertainty in the lead up to the original March Brexit deadline.

Amy Wood, Property Economist, at Capital Economics explains:

“The survey showed that office space under construction totalled 13.2m sq ft, 12% higher than the winter 2018 survey and above the long-term average. The increase in the active pipeline mainly reflected that the volume of new starts reached the highest level since 2016 Q1.

“Notably, at around 6.6m sq. ft., space under construction dated for 2019 was higher than reported in the previous survey. In fact, the amount of space expected to reach practical completion this year is on track to match the previous two years. By submarket, office completions are expected to be higher this year than their respective 10-year average in the City of London and other markets, while conditions look more restrictive in the West End. (See Chart 1.)

“Nevertheless, the medium-term outlook for office completions appears more subdued. For one, the amount of space under construction remains below its 2016 peak of almost 15m sq ft. Further, recent weak outturns from the CIPS/Markit Construction PMI and the fact that the balance of RICS surveyors continue to report declining office development starts suggest that there is little scope for office space under construction to increase.  

“Admittedly, these surveys appear to have been affected by weak sentiment caused by Brexit uncertainty and, as such, we think that they overstate the likely reduction in the office development pipeline. But we still think that they provide a reasonable indication of direction. They are also consistent with reports that there are a lack of development sites and that rising construction costs and pressure on resources, most notably labour, are limiting further development. More importantly, we think that the softer outlook for office rental value growth in Central London compared to recent years will act as a further disincentive for developers.

“On balance, we think that stronger supply will weigh on Central London office rental value growth this year, particularly in the City. In turn, we have revised down our 2019 forecast for rental value growth in the City and West End to 0.4% y/y and 0.3% y/y respectively. However, with office space under construction likely to reduce over coming years, we continue to forecast Central London office rental value picking up to around 1.5% y/y over the forecast horizon.”

james.wallace@realassetmedia.com