Rents in London based commercial property rose at an average rate of 8.5% throughout 2015 and saw an increase on the 7.8% recorded in 2014.
These results are according to a market analysis report compiled by research experts, MSCI and a leading commercial property consultant. The London Markets Analysis 2016 collected the statistics of over £30 billion of commercial property assets in 20 of the capital’s submarkets and evaluated the total investment as well as the resulting rent prices.
The findings showed that investments throughout 2015 saw London achieve a total return of 18.1%, with the King’s Cross/Camden area seeing the most returns on investment at 27.3%. Following Camden/King’s Cross on London’s most profitable submarket for commercial property are the Eastern Fringe and Marylebone and Euston with 24.7% and 23.1% returns, respectively.
Unsurprisingly, rental growth was also registered at its highest rate within the King’s Cross/Camden area, where rent prices increased by 17%. As well as attributing this to the effects of the thriving King’s Cross Central development, the report also asserts that the increase in growth is a result of other factors.
The lack of available commercial space, as well as higher demand for accommodation from occupiers has led to the increase in rent prices. In addition, some areas of the city have seen a greater rate of conversion of commercial property to residential accommodation, which has naturally led to a decrease in available space.
All of these factors are particularly evident in Mayfair, one of the most sought-after areas in London for offices, where the declining supply of commercial space resulted in 11.9% growth in rent over the last year.
However, Mayfair’s average office space yield of only 3.7% also saw it remain as the city’s most supplied commercial property submarket.
Slight inward shifts in yields were a common theme across the city throughout the year, while the largest shift was recorded in the commercial property market in the Western Fringe. This area comprises office space in Smithfield, Farringdon and Clerkenwell and saw its equivalency yields decrease to 5.2% from the 6.0% that was recorded in 2014. This resulted in the slight slowing of rental growth in the area. A similar shift in yield also occurred in the Marylebone and Euston area, where a fall of 70 basis points led to a 2015 return of 3.9%.
Yield shift in London areas as a whole, however, slowed down in comparison to recent years. This highlights the significance of rental growth as a result of a competitive market of companies with aims of expansion.
Vice president of MSCI, Colm Lauder, hailed the performance of investment in London’s commercial property market over 2015, as a result of rental growth, and also noted the strengthening of prices in the city.
Lauder also went on to address the slowing of yield compression as a result of key areas reaching “record yield levels which question price fundamentals.”
Lauder concluded the report by asserting that rental growth has emerged as “the main performance driver” in the commercial property market.