Central London office rental values hit double digit annual growth

Rental values in central London’s booming office market grew by 10.3% in the year to October 2015, the first time annual growth has hit double digits since April 2008.

The capital saw 1.1% growth in October, as demand for office space continues to overwhelm limited availability, according to the latest CBRE Monthly Index.
Despite rapidly rising rents, take-up of offices in central London continues to outpace the 10 year average. Some 3.6 million square feet of space was snapped up by businesses in the third quarter of 2015, with a further 3.8 million currently under offer and expected to complete before the end of the year.
Office rents aren’t just rising rapidly in London. Rental values in the office sector grew by 1% across the UK last month, only the third time rents have grown this quickly since the financial crisis, and much faster than the 0.4% seen across commercial property as a whole.
Capital values are also growing fastest in the London office market, at 1% in October, some way ahead of the 0.6% for offices outside London, and twice as fast as the 0.5% growth seen across all commercial property. Together, the rising rents and capital values in the UK office market are giving investors total monthly returns of 1.2%.
This strong rental value growth means that UK offices are now highly reversionary. The average initial yield for UK offices is now 4.1%, below the pre-crisis low of 4.2%. This compares with the average equivalent yield of 5.4%.
The position is even more marked in central London Offices where the average initial yield of 3.1% compares to an average equivalent yield of 4.5%, although strong income growth has closed the gap over the last few months.
‘London’s office market has been heating up for some time now, but there is still strong business demand across the capital,’ said Kevin McCauley, head of central London research at CBRE.

‘Rental value growth has not been this sustained since before the financial crisis, and together with rapidly rising property values, landlords and investors are experiencing a booming market,’ he added.

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