West end office 2nd October 2014

Returns from office investments in London’s West End, surged to 23.3% in the 12 months prior to the end of June in the strongest performance in over four years, reflecting a strengthening occupier market that is in line with the pick-up in the broader UK economy.

According to the latest IPD/Colliers International West End Office Investment Report, the return was more than double the 10.3% y/y posted in the previous 12 months. It highlights the dramatic improvement in the market since the lull of 2012 and early 2013, and reinforces the position of the West End as the UK’s top-performing office investment location.

While sustained buying – particularly from overseas investors – has been increasing capital values in recent times, the market is now seeing substantial rental growth which is also driving returns. During the first half of 2014, rents surged by 5.7% h/h, reflecting an annualised growth of 8.7% y/y between June 2013 and June 2014. As a result, rental values in the West End are now only 5.5% off their previous cycle peak in March 2008.

Colliers co-head of central London investment, John Olney, said: “With an improving economic environment, growing occupier demand and supply remaining constrained, the only consequence can be continued rental growth. “In circumstances such as these, rents have a tendency to ‘jump forward’ rather than increase incrementally. Accordingly, the market starts to see rents increasing by movements of, say, £5-£10 per sq ft rather than £1 or £2 per sq ft that we have seen during the more muted demand environment of the past three years. “These are the conditions where double digit annual rental growth becomes possible. The IPD West End office sample is already showing rental growth in the 12 months to June 30 of 8.7% and we expect this to comfortably break 10% next year.”

There was £5.1bn of transactional activity in the West End market during the research period and, for the first time, average capital values broke through the £1,000 per sq ft mark to stand at £1,112 sq ft. However, with London’s prime residential market booming to reflect values of over £4,000 per sq ft, an increasing number of investors also have an eye on converting office buildings into homes.