LMA 2015 reflects London values surge 25.02.15

The full 2015 London Markets Analysis Report can be downloaded here

Investment returns from commercial property in London surged upwards in 2014 as the capital strengthened its position as a leading world real estate market.

The latest London Markets Analysis report by Levy Real Estate and MSCI analyses more than £30bn of assets across 20 key submarkets and shows that in 2014 the capital’s commercial property sector reflected an average return of 22.2%. In 2013, the corresponding figure was 14.2%.

Returns are being driven by rental growth which averaged 7.8% across the submarkets analysed. As rents in prime core locations rise quickly, businesses are looking for new areas in which to settle and this is producing some transformational changes in rental levels.

For  the second year, London’s Northern Fringe around City Road, Old Street and Shoreditch  retained its position as best performer as returns leapt to 32.3% for 2014 (2013: 23%). This was partly fuelled by equally emphatic rental growth of 21.7% (2013: 9.3%).

Docklands saw the biggest equivalent yield shift in 2014 as average yields sharpened 200 basis points from 8.5% to 6.5%. Mayfair retained its position as having the most valued assets with equivalent yields sharpening by 50 basis points to 3.9%.

As demand for space remains high and supply is constrained in some areas, rents continue on their upward trajectory. Mayfair saw rental growth of 15% last year – three times the level of growth achieved in 2013.

Levy Real Estate Investment Partner, Simon Heilpern, comments: “London is the focus for extraordinary business and population growth which is feeding directly into its property markets.

“Investors can see that the capital is taking a strong strategic lead and moving to provide the infrastructure and built environment that a city of world-class stature needs. This is what makes its long-term prospects – and those of the property sector that serve it- so attractive to investors.

“With investor demand fierce and development still running to feed the supply pipeline, we have seen an exceptional two years in London’s property markets.

“In the medium-term, as the markets gradually move back towards a position of equilibrium, we will no doubt see a slowing in the main growth metrics. However, the overall trend will be progressive as  new hubs of London activity such as King’s Cross, Southbank, Docklands, Earl’s Court and Battersea take their place alongside the capital’s most mature markets.”

The London Markets Analysis  is the definitive study into the capital’s commercial property sector and tracks the comparative performance of more than 1,000 assets. It looks at the fundamental drivers of the market and what is contributing to returns, rental growth and yield shift.

Colm Lauder, Senior Associate at MSCI, comments: “The leading London markets in 2014 were again emerging locations that have seen significant regeneration.

“Places like the Northern Fringe, which includes King’s Cross, posted the strongest returns with an impressive 32.3%. Like other emerging markets this area outperformed thanks to a combination of growing investor demand and stronger pricing and crucially impressive levels of rental growth at almost 10% in the year.

“This rental growth and continued demand from investors highlights how far these fringe markets have come since 2008 as they compete with the West End and The City not just for leading tenants but also major global investors.”

For the first time, this year’s report also includes future rental projections from Real Estate Strategies which look at how the 20 submarkets will progress.

Real Estate Strategies’ Malcolm Frodsham comments: “London is very well positioned to benefit from the strengthening domestic, European and global economies, with a high representation in those industries that are expected to grow most strongly. Tenant demand for offices in London is therefore expected to remain strong, possibly even very strong in the short term, and we expect office rental growth in central London to moderate in the coming years to average around 5% pa.

“West End retail rents may have rocketed in recent years and this year we expect to see a further short-term boost to the global economy from the fall in oil prices so West End retail rents may spike higher.

“However, low interest rates have been very supportive of asset prices and investors will have to wean themselves off further yield falls to deliver future performance.  Momentum is expected to push yields a touch lower in the short term but the election is expected to trigger a period of market reflection.

“Central London is the most exposed UK market to political uncertainty and the upcoming election is unusually open. Multiple elections and an EU referendum are also possible. Arguably, these ‘dark clouds’ will reduce the risk of a significant market re-pricing in the future by tempering investor expectations now.

“This will allow yields to drift higher over the coming years while rental growth counteracts the downward drag on values.”

The full 2015 London Markets Analysis Report can be downloaded here

Levy - London Markets Analysis