Saturday 23 September 2017

London rents to climb most in 15 years - report

Canary Wharf in London. Office rents in the city will climb the most in 15 years, say BNP Paribas Real Estate
Canary Wharf in London. Office rents in the city will climb the most in 15 years, say BNP Paribas Real Estate

Patrick Gower

Central London office rents will climb the most since 2000 this year as tenants compete for a dwindling amount of space, according to BNP Paribas' real estate unit.

Average rents will jump 17pc to £655 (€747) a square metre from £560 at the end of 2014, the broker said in a statement. Vacancies in the West End district will drop to 3.5pc, the lowest ever recorded, BNP Paribas Real Estate said.

Competition for the best office space in London is intensifying as the UK's economic recovery spurs job growth after years of below-average development. That's attracting investors as total return, a combination of rental income and changes in value, will probably reach 17pc this year, the broker said.

"The London office market continues to go from strength to strength," Steven Skinner, head of West End investment at BNP Paribas Real Estate, said in the statement. "The combination of volatility in other asset classes and historically low yields in sovereign-bond markets should ensure that capital continues to flow into the London market." Office vacancies in the City of London financial district are set to reach a 15-year low of 4.8pc in 2015, pushing up average rents by 16pc this year and 12pc in 2016, according to the statement. Midtown vacancies may reach 4.3pc this year, generating rental growth of 15pc this year and 10pc next year.

Average London office prices are seen increasing 14pc in 2015, with Midtown reaching 15pc. In the West End, which vies with Hong Kong for the world's most expensive offices, rents are expected to climb 18pc. That would produce a total return of 17pc, BNP Paribas Real Estate said.

Total return for central London offices was 23.5pc last year as rents rose by the most in the UK, researcher Investment Property Databank (IPD) said on February 4. The amount of space available to lease in the UK capital fell 20pc to the lowest level in 14 years as technology firms such as Amazon.com, Google and Twitter expanded, broker, Knight Frank said in a separate report on the same date.

The forecast increase in rents came as it emerged that investors spent a record £70.7bn on UK commercial real estate last year as they sought alternatives to the low returns of fixed-income assets.

The total for 2014 was 32pc higher than a year earlier and compares with the previous record of £67bn in 2006, according to data provider CoStar Group. There were 140 deals valued at £100m or more.

Buyers from around the world are competing for offices and other UK commercial properties as the economy improves and a shortage of space in London pushes up rents. Foreign investment climbed 25pc to £25.4bn during the year. In the capital, the proportion of transactions by overseas purchasers rose to 61pc.

"The UK's economic strength was a major factor but the continuation -- and indeed strengthening -- of the flight of capital chasing higher-yielding investments played a major part in deals being done," said managing director Giles Newman in a statement.

Last year was the busiest year on record for commercial real esate in Europe with the continent's banks selling more than €80bn worth of property loans, and much of those sales involved Irish assets.

Despite this country's small size, Irish deals dominate the market. A report from Cushman & Wakefield showed that €80.6bn worth of property assets came off banks' balance sheets during 2014 - the highest on record, with nearly €30bn of those sales by Irish institutions.

NAMA disposed of €10.1bn worth of loans during the year, while IBRC off loaded another €18bn worth of loans tied to property.

Among the sales were the Project Tower portfolio that had a par value of €1.8bn.

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