Rental growth driving London markets 09.10.15

Analysis of 20 key commercial property markets across London shows that rental growth is increasingly the driver of total investor returns.

A half-year update of the London Markets Analysis by Levy Real Estate and MSCI shows a clear picture of returns being driven by rising rents rather than the yield compression which has powered the capital’s markets in recent years.

Levy Real Estate Investment Partner, Simon Heilpern, comments: “For the past five years, London commercial property has been the object of huge investment. This weight of money has driven down yields and fuelled total returns.

“However, we are now seeing a sea change in the market. There is still a considerable weight of money looking to invest in the capital but rental growth is playing an increasingly important part. If the level of return performance that we’ve seen in recent years is to be maintained then rising rents are the key.”

The research analyses the performance of more than £30bn of commercial property assets in the capital. The latest update compares performance in the second half of 2014 with the first half of this year.

In terms of total returns across 20 key locations during the first half of this year, Victoria saw the biggest uplift with returns of 11.4% (H2 2014: 8.9%) whilst Camden continued to show the highest return overall at 13.7%. However, this was down from the 16.3% return it delivered in H2 2014.

Emphasising the growing importance rental growth, Victoria also showed the biggest uplift in rents in the year to June with an average increase of 12.1%. The next fastest growing location was Covent Garden where rents were up 10% on average.

Simon Heilpern observes: “The market has stabilised post-recession and now we are looking for growth which is founded on a strong occupier market and that is less reliant on the sheer weight of money looking for a home in the London commercial real estate market”.

Colm Lauder, Senior Associate at MSCI commented, “The London market is moving into a new phase shifting from a recovery phase to a firm growth mode. In the last few years, performance has been driven by yield compression as investors, domestic and foreign, piled in initially buying discounted assets, then focusing on London as a safe-haven. The focus is now on London as a location that can deliver income growth, through rents rising in tandem with a buoyant UK economy.

Rental values in the capital have grown strongly over the last six months, with average commercial rents up 4.2% since January, with popular locations like Covent Garden seeing rises of 10%. The strong rental value growth in key locations has emphasised the shift from pricing recovery to income growth, with rental performance now the key determinant of investment performance for the London commercial property market.”