COMMENT As we start the year with a newly elected government installed in Westminster on a promise to “get Brexit done”, I would like to reflect on how London is faring as a global real estate market and why I believe it will continue to deliver attractive returns as we enter the 2020s.
While the central London office investment market has undoubtedly been subdued, this picture isn’t as downbeat as it first appears.
In contrast to the yield compression seen across the eurozone over the past four years, prime London office yields have mostly experienced a period of stability and offer a healthy premium compared to their European counterparts.
Although London has trodden water since the referendum, attracting a smaller share of global investment into Europe, once Brexit is resolved we should expect that trend to reverse and the pricing gap between London and, say, Paris, Amsterdam and Berlin to narrow.
How to stay relevant
The fundamentals of the London office market are robust. A structural undersupply, which is now more than a decade old, is underpinned by robust occupational markets. JLL figures show London is on track to lease total volumes for the year above the 10-year average of 10.1m sq ft, with prime rents in both the City and West End remaining stable, and in the case of the latter showing some growth.
Factor in favourable currency conditions and it’s clear why, for the international investor, London has remained an attractive buy, ranking top, according to Cushman & Wakefield, in terms of cross-border investment.
Ensuring London’s real estate offer continues to be relevant is vital. The dominance of the flexible workspace sector cannot be understated. But while flexible workspace is the current market disrupter, a far broader rethink of how our spaces are used, designed, built and managed is required to keep London thriving.
Some of the areas my team are busy thinking about include the impact of technology, plus demographic and societal changes, and how we can use the power of data and digital connectivity to materially change our relationship, not only with our customers but everyone who uses our buildings.
The path to net zero
Ensuring our buildings are as healthy as they can be is a priority too. Our latest development, the Marq, is the first new-build project in the UK to achieve both a BREEAM New Construction Outstanding rating for its shell and core and the WELL Gold Certification. We are looking at the sustainability of our buildings and ways to reach net-zero targets as an opportunity for our spaces to become a real differentiator among employers.
Offsetting the built environment’s carbon footprint is just one of London’s challenges. We, as a sector, need to be mindful of all of real estate’s impacts, such as increased congestion and poor air quality, through to the growth of tourism and its own resulting carbon cost.
We also need to make sure there is sufficient investment in infrastructure, transport and housing, as well as the wider social fabric of society, to support the quality and type of spaces we need to maintain London’s viability.
Alongside the macro-economic risks faced by all global cities, London is of course uniquely dealing with Brexit and all that comes with it. While the recent election result has meant a settled relationship with our largest trading partner is perhaps one step closer, I believe almost whatever the landscape post-Brexit, there is considerable upside to the London office market and its fundamentals remain strong.
Paul Clark is chief investment officer at the Crown Estate
