London commercial property market expected to see strongest rental growth in 2015
London’s commercial property market experienced the strongest rental growth in 2014 and is expected it to stay in the lead over the next 12 months, according to a new outlook report.
The recovery in the UK economy combined with low levels of development means that the balance between demand and supply is now swinging in favour of landlords, the report from Schroders also says.
The report says that 2014 has been a good year for UK commercial real estate and unleveraged total returns are likely to be close to 20%. Most of this year’s performance has been driven by a favourable fall in property yields, as investors seek income.
‘Looking ahead to 2015 we expect that total returns will remain in double figures, but that rental growth will make a larger contribution. The recovery in the economy combined with low levels of development means that the balance between demand and supply is now swinging in favour of landlords and we anticipate that rental growth will accelerate,’ explained Owen.
In the office sector, the emergence of central London as a powerhouse for international accountancy, law, media and technology companies has pushed vacancy rates back down to pre-crisis levels, not just in the prime locations of the City and West End, but also in less established areas such as Farringdon, Kings Cross and the South Bank, the outlook explains.
Similarly, the report says that retail rents in many parts of London are rising on the back of strong population growth. There are also an increasing numbers of young professionals who choose to live in inner London rather than copy their parents and move to the suburbs. This is leading to the rapid gentrification of areas such as Brixton, Hackney and New Cross which were previously relatively poor.
While rental growth outside London is patchier, some regional markets are definitely coming out of hibernation, the report also says. For example, in Manchester the office sector stands out as the strongest of the big regional cities, thanks to the success of its professional services. ‘In addition, we are also seeing good demand for office space in Bristol and Edinburgh and certain smaller markets such as Aberdeen, Brighton, Cambridge and Reading with strong local economies,’ said Owen.
In the industrial market, rents are now rising by 2% across the South East and Midlands and the report says that part of this is due to a cyclical upturn in demand from traditional occupiers such as builders’ merchants, but part is also due to the rapid growth in parcels, driven by online retail.
Overall, and given a reasonably high yield and a further rental growth as the economy improves, we expect that next year will see another solid performance from UK commercial real estate. The latest Investment Property Forum (IPF) Consensus Forecast suggests total returns of between 10 % and 12% in 2015.
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