Supply shortages and sustained international demand will keep the London office market ‘strong and stable’, according to a new report by Recore. The Brexit deal has put an end to the uncertainty and it has not had an impact on pricing.
‘There remains a significant cap rate margin between London and the major Eurozone cities, giving a significant pricing advantage to London and underlining its enduring appeal to international investors’, said Richard Linnell, director of Recore.
In Q4 2020 the lockdown caused the market to endure a stop-start situation, the report points out, but investment market performance was strong. Volume was at an above average of £4.3 billion, which augurs well for 2021, especially when travel restrictions will be lifted.
Take-up remained low because of the effects of the pandemic, but the figures showing the amount of available space are misleading, the report says. Second-hand space is available only in smaller units or on shorter lease terms, while there remains a limited supply of new larger units to let for a market standard term.
Furthermore, many schemes have been delayed by the lockdown, so a further reduction in the supply of new space is expected this year and the next, especially in the City. This constrained supply situation will continue to support the recovery in rental values across the market after the recent slight fall.
In the City there is a lack of supply of new space for tenants seeking large offices in new schemes, and this pressure will continue as there is very little speculative space available until 2023. London’s West End will see stronger supply from this year onwards.
The serviced office/flex sector, which accounts for around 6% of the London office market, has been under great pressure from reduced rent collection this past year, but it is ‘expected to recover well and provide flexible space that is in demand by users returning to work’.
The next few months should see a gradual but significant reduction in remote working, according to Recore, and additional space per person will be required to improve the safety and attractiveness of offices. The reversal of decades of ‘densification’ will offset any negative effect of remote working on demand for offices.