Office latest 30th July 2013

Total returns for central London offices and retail are expected to move into double digits this year as improved occupier sentiment is driving increasing rental value growth, Cluttons has said in its Commercial Property Market Outlook.

Returns are set to achieve between 14% to 16% for prime office assets in the West End and City markets, the highest levels since the end of 2011. Central London retail has also witnessed resurgence in demand with total returns of 17% to 18% forecast for 2013, the highest levels for almost three years.

Upbeat sentiment and lack of supply has seen Cluttons forecast rental value growth of 6% for central London offices this year, the highest growth rate for 16 months. International investors, which have accounted for 70% of London based office investments so far this year, continue to dominate the market, and bidding wars have encouraged UK institutions to refocus outside the capital for well-properties across all sectors. This is especially true for assets with secure, long dated income.

Although the wider UK regions continue to witness limited rental value growth, offices remain the strongest performing commercial sector, underpinned by intense demand and robust performance within central London and the south east.

Sue Foxley, head of research, Cluttons, said: “The market is clearly benefiting from increased confidence, indicated by the diversification of international investors who continue to dominate the market. Increased competition and limited supply continues to drive an upturn in capital values within Central London, with trophy assets often transacting well ahead of asking price as a result. “There are opportunities outside the capital, however. Investors have recognised that London’s market is highly competitive and that they must broaden their horizons as yields harden.

There is sustained interest in well-located, high quality assets, particularly in key locations within the M25. The south eastern office market is anticipated to produce total returns of around 12% this year, the highest levels recorded in nearly three years.” As the economy returns to growth, well located and well let retail outside central London is attracting renewed investor interest with keener prices being paid for the best stock In terms of the industrial market, well-let regional sheds offer good value potential, though supply remains restrictive.