As we learned from the pandemic, everyone needs a place to live, not everyone needs a place to work. However, done right, commercial property is in fact a far stronger and safer investment. One of the key reasons is your tenants: They will be long-term and likely to lease your building for a substantial portion of its life. And some will invest their capital in upgrading your property to attract and retain the best staff.

Not all commercial property is a smart investment, getting this right is all about one thing: Location.

Why central London?

Key movers and shakers are extremely keen to be as close as possible to the city centre. This is a dynamic that has existed for centuries in London and isn’t going to change any time soon.

London has roughly 105,000 civil servants, but that is just the start. Much of the national economy is centred here, and much of the global economy flows through too. Law, finance, media, creative agencies, and wealth managers for example, all have their own hubs making business flow better than anywhere else in the world.

The endorsement of a central London postcode like SW1 carries real weight, and might get people meetings they otherwise wouldn’t have managed. Most importantly for these organisations, London is a place where the best talent in the world wants to live and work.

There is no better place to be a global citizen, with world-class culture, a plethora of cuisines, an events calendar with something on offer every night of the week, and Europe just a short flight away. With English still the most-studied language in the world, the newly-educated elite can easily feel at home here. Even if English is not the 1st or 2nd language, every culture and nationality is well represented in London.

This talent knows their value and will not settle for second best, why live and work somewhere boring when something as exciting as London is on offer. That kind of excitement isn’t going to fade away just because the United Kingdom is not in the EU any more. A great example is Switzerland and its continuous growth since 2016, when it decided to suspend further negotiations for EU membership, making Switzerland known as a country with “good offices” due to their neutrality.

Why the right buildings are in central London

Architectural tastes can change and buildings that seemed sleek and modern in the 1990s can feel incredibly dated now. That’s why focusing on legacy architecture is key. This is the so-called “Lindy Effect” – an organisation that has existed for 100 years is far more likely to survive another century than an organisation that has only existed for 100 days. The same is true of buildings, especially buildings that have the blessing of being grade-listed.

Grade I and II listed buildings can be found all over the city, but they are especially clustered in desirable postcodes where Government departments and top tier private sector organisations want offices – and are willing to pay a premium for them.

Why now is the right time to invest in London’s commercial property

The future for the office itself is bright. While the pandemic added some flexibility to the work week, a future of entirely remote work is simply unsustainable. Survey data shows Gen Z employees want a return to the office, where they can build connections and learn from their older colleagues. Data from Transport for London suggests weekday tube usage has almost completely recovered to pre-pandemic levels. Organisational leadership – whether that be CEOs, ministers, or permanent secretaries – are also pushing for full returns to the office. And for any Government agencies that handle sensitive information, a fully remote working environment is simply not possible.

Then there is the financial situation itself. Because of high interest rates and some post-pandemic uncertainty about the amount of office space required, it’s a great time to buy long-term assets at prices below their usual value. Most of your competition will have to raise finance in a very costly environment, so if you have the liquidity to make one of these long-term investments, there could not be a better moment.

This extends not just to the purchase itself but also to any renovations required. Older buildings often need to be retrofitted to attract the most secure and lucrative tenants, particularly ones who have exacting ESG standards to meet. The current owners may not have the liquidity to undertake such a project, meaning a good price can be negotiated.

Many investments promise something like generational wealth. But ask yourself what you are more confident about: The price of a particular stock or index exceeding inflation over the next 50 years, or the fact that people will still want to inhabit beautiful buildings that have existed for generations in London come the year 2073? Now think about how the population is continuously growing. If you have the ability to get into the market, there couldn’t be a better time to invest in it.

In the realm of prime commercial real estate, one notable advantage lies in the abundant array of assets that cater to investors across various investment levels. This market’s inherent versatility allows astute investors to explore options that align precisely with their financial goals and risk appetite, without the need to overextend their resources.

In Q1 and Q2 Unica Capital has observed that acting swiftly is key to securing the best deals. As the market rebounds and adjustments continue, the timing is ripe for strategic investment. Notably, the seven core markets, including London, have shown a return of investor interest after a period of weaker investment volumes. With central London appearing to have fully corrected, followed by Hamburg and Amsterdam, investors can anticipate increased transaction activity in these markets.

Higher interest rates have impacted the UK commercial property market, resulting in a decline in buyer activity and downward adjustments in valuations. According to CBRE figures, since July 2022, all-property capital values have fallen by 20%, with the industrial market experiencing a significant drop of nearly 30%. The rise in interest rates and changes in investor sentiment have played a pivotal role in depressing capital values. However, occupier demand and rents have remained resilient amid these changes.

Q3 and Q4, predictions for the year ahead.

This cautious stance is attributed to the anticipated continuation of above-average headline inflation, prompting a thoughtful approach to navigating the evolving real estate landscape. The lending environment may not be accommodating enough to alleviate this pressure, and the possibility of further rate hikes cannot be discounted. Consequently, investors must carefully navigate the market landscape to identify optimal investment opportunities.

Despite the challenging conditions, leasing activity in London remains steady. Notably, in their Central London office market report JLL have reported thirteen pre-lets across prime London City locations taking place during the second quarter, indicating ongoing demand for high-quality spaces. The service industry sector has been particularly active, with retail and leisure, insurance, and service office operators contributing significantly to quarterly leasing volumes.

Unica Capital is poised for Q3 and Q4 with their deep-rooted understanding of the market dynamics, allowing them to capitalise on opportunities that others may overlook. Their strategic approach to renovations and refurbishments ensures that they can elevate vacant spaces to higher standards and meet new ESG standards, maximising the potential of each property. As the London property market shows resilience and rebound, Unica Capital stands as a reliable and experienced partner for investors seeking success in the prime commercial real estate market.

As the London commercial property, office and residential property market rebound and opportunities arise when others are looking to divest, we stand ready to expand our current portfolio. With a deep-rooted understanding of the market dynamics, and a commitment to delivering value and driving positive change, we aim to continue capitalising on the demand for high quality commercial office space and the surge in residential rents, building upon previous success in the world of property investment.

Unica Capital’s most recently completed project is a prime commercial office space on Portland Street; this real estate investment is a testament to their commitment to excellence and investment in historic buildings in desirable locations.

Located on the vibrant Portland Street in the heart of Soho, this recently acquired property has undergone a meticulous refurbishment both inside and out, ensuring the highest standards of quality and sophistication. The building’s historic charm is showcased through exposed brickwork and exquisite parquet flooring, creating an atmosphere that blends the best of the past with the demands of modern businesses, ready for a wide mix of potential office tenants.

Connectivity is a key advantage of this latest real estate investment property, as it benefits from exceptional transport links. With five underground stations, including Oxford Circus, Leicester Square, and Tottenham Court Road, all within a short walking distance, tenants and their clients will enjoy seamless access to major transport hubs.

Spanning just over one square mile, Soho boasts walkability, a desirable feature sought by today’s modern commuters. This strategic location enhances the property’s financial investment appeal, making it a highly desirable head office location for businesses seeking convenience, connectivity and the ability to impress current and future clients.

Surrounding the building is an area renowned for its diverse, lively, and vibrant atmosphere; Soho holds a well-deserved reputation as one of London’s premier socialising destinations. However, this maze of streets nestled in the heart of the West End’s nightlife scene offers much more than just pubs and restaurants.

This dynamic district is a powerful tool for employee retention and attraction. Its unique location and vibrant environment fosters a sense of community with abundant options for dining, entertainment, and leisure activities, creating a well-rounded work-life balance for tenants and their employees.

When macroscopic events such as Covid-19 occur, it’s natural they are followed by periods of uncertainty. This is what we’ve seen in London’s commercial property sector in recent years: the upheaval of the pandemic acting as a catalyst to developments that contemporary technology and work patterns had previously set in motion. What we shouldn’t do is mistake this development for decline.

News that London is experiencing record volumes of office refurbishments undermines some of the more pessimistic predictions we are witnessing for the future of the ‘office’. Since records began in 2005, there are a record volume of office refurbishment schemes starting, according to Deloitte’s Summer 2023 London Office Crane Survey. “A vote of confidence” for the commercial property sector.

London’s West End is seeing strong demand for high-quality, well-fitted office space, with estimated rental values 8% above last December, according to one of the West End’s main landlords. In a statement issued on June 14th, Shaftesbury Capital Plc notes “confidence for rental growth prospects,” which spreads throughout its portfolio focused in Soho, Covent Garden and Chinatown.

We believe these examples to be more than just anecdotal and point to two factors that are responsible for the office market in central London continuing to defy speculation of its decline.

1. The need to upgrade offices to meet new UK Minimum Energy Efficiency Standards (MEES).

Under the UK Minimum Energy Efficiency Standards (MEES), commercial buildings with an Energy Performance Certificate (EPC) rating of less than B by 2030 will be unable to legally lease their buildings. Currently, some 80% of office space in London does not meet this specification. ESG considerations play an important part in a property fund’s credentials and are a vital consideration for investors. In particular, environmental factors are becoming more important, with tenants increasingly considering the carbon footprints of the buildings they occupy.

As a result, property funds are having to look at their existing property portfolio and improve it or divest quickly. The alternative is being left with assets that no one wants to rent or buy.

2. A new age for workspaces – spaces with up-to-date tech, collaborative environments and improved onsite services.

Among the factors prolonging uncertainty are the varying desires of working patterns among workers and businesses. As long as employers demand in-person and employees call for homeworking, it’s clear there has to be a compromise. We are seeing a new way of working that demands a new type of flexible office space.

Employers who do not invest in modern, flexible offices will suffer when recruiting new staff as they look to rebalance their work/life dynamics. Chairman of Knight Frank, William Bearmore-Gray, has said about last year: “…for our London leasing agents it was probably one of their busiest years. The majority of the interest we are seeing is from companies which realise very clearly now that the office is a strategic tool to attract the best talent and increase productivity.”

A similar story emanates from agents Cushman and Wakefield, who reported a record number of office moves in 2022. This reflects the move to hybrid working (WFH), with most companies wanting less space in modern and better-located buildings.

While workspaces are changing, this fluctuation by no means signals a decline in the London office sector. When we consider the recent flurry of refurbishments across the capital, it is quite the opposite. Far from constituting a last stand by a fading industry, this wave of redevelopment marks the start of a new era for the commercial property sector and ushers in a more flexible, greener future. Indeed, a recent study showed two-thirds of flex spaces are more than 80% occupied.

Improved environmental credentials and modern flexible spaces will improve demand, and therefore, valuations. Whilst repurposing existing offices for other uses will decrease supply in the sector, it is ultimately raising rental income, as has been seen in the buy-to-let market.

Looking back at the Q1 2023 outlook, the market was subdued yet strong, with an increasing number of respondents expressing a belief that economic conditions were stabilising or even showing signs of improvement, which is a promising sign for the rest of the year.

London’s prime office sector is poised for substantial rental gains in Q2 and Q3, with a net balance of +29% anticipated. This surge in rent is driven by an increasing number of businesses realising the significant advantages that come with occupying top-notch, cutting-edge spaces. The Unica Capital REIT Portfolio has benefited from this demand and is positioned to offer high returns for long-term real estate investments, with a portfolio made up of quality rental spaces in sought after locations.

Sustainability
Increasingly the allure of modern, environmentally conscious buildings with superior amenities has captured the attention of forward-thinking companies seeking to attract and retain top talent.

Deloitte’s Crane Survey confirms this trend, reporting that a record number of office refurbishment projects covering 3.2 million square feet are currently underway in the city. This surge in activity is driven by landlords racing to achieve Energy Performance Certificate (EPC) B ratings by 2030. Unica Capital leads the way in this prime office space sector with a portfolio that is tailored to meet the evolving needs of modern businesses. Our properties not only embody excellence but also boast exceptional environmental credentials that align seamlessly with the sustainability goals of forward-thinking organisations. With a strong commitment to energy efficiency, Unica Capital offers an outstanding selection of office spaces that require no additional investments to meet government targets—a remarkable achievement in a market where a mere 20% of London’s offices currently meet these stringent standards.

Industry leaders, including Helical and GPE, echo the need for sustainable development in prime commercial office space. Helical’s CEO, Gerald Kaye, emphasises the strong tenant demand for sustainably designed buildings with top-quality amenities, leading to rising rental values. GPE shares this confidence in London’s tenant demand and has increased its rental growth guidance for prime offices to 3-6%. CEO Toby Courtauld highlights the growing divergence between the financial investment prospects of premium office spaces and the rest, particularly in the highly sought-after West End, where sustainable and well-designed spaces are scarce.

Flexible Spaces
The increasing demand for prime office spaces in London is driven by a variety of factors. Businesses, both large and small, are embracing the concept of hybrid working, leading to a healthy mix of tenants with requirements to downsize. Simultaneously, prominent organisations are opting to leave their outdated headquarters behind, seeking refuge in modern, environmentally conscious buildings that project a strong commitment to sustainability.

Unica Capital’s team of Property Investment specialists possess an unparalleled ability to identify, finance, and manage these real estate opportunities. With their expertise and strategic insights, they ensure that our clients’ investment needs are not only met but exceeded. Our track record speaks for itself, as we consistently deliver exceptional investment vehicles tailored to our clients’ exacting requirements.

Investors, too, are eagerly embracing the positive outlook for prime office rents in London. Despite a brief period of caution, the latest figures indicate a renewed confidence, with a net balance of -14% for investor demand in Q1—an improvement from the previous quarter. This reaffirms the resilient nature of London’s commercial market and the vast potential it holds for astute investors seeking promising opportunities.

Unica is at the forefront of London’s transformative real estate investment landscape, driving the surge in prime office rents. With our unwavering commitment to excellence and our portfolio of energy-efficient, state-of-the-art spaces, we are shaping the future of the city’s office market. As prime office rents increase, Unica Capital and our investors play a pivotal role in the city’s growth and prosperity. London’s skyline is set to reach new heights, and Unica Capital is leading the way.

Recent data from Transport for London is showing that tube journeys are at around 80% of pre-pandemic levels, indicating that even with more people than ever choosing hybrid working, the vast majority have a primary base within an office setting. To lure workers back – and retain the best staff for longer – gone are the days of minimal offerings in second-tier spaces; bike storage, some communal recreation space, and a well-stocked fridge.

With conclusive evidence that since 2019 there has been an accelerating sales price gap for similar buildings with and without sustainability ratings, which now stands at 25% for London offices, the need for upgrading buildings to offer high-quality, amenity-rich, and energy-efficient offices has never been more urgent. The demand for these spaces will only increase now hybrid working has settled and companies revise their net zero targets.

Under the UK Minimum Energy Efficiency Standards (MEES), commercial buildings with an Energy Performance Certificate (EPC) rating of less than B by 2030 will be unable to legally lease their buildings. Further, research from Deloitte found that 80% of London offices do not currently meet these standards and significant refurbishments are required to prevent energy-inefficient offices from becoming stranded and unable to be leased. For those ahead of the curve the rewards are clear to see. With a squeeze on supply as some delay in meeting energy efficiency standards that by 2030 will be imperative if a portfolio is to remain active and producing the highest yields possible, it is more vital than ever to secure future-proof commercial assets whose market appeal will endure.

While this may seem like bad news for companies operating in the sector, their are opportunities in property market and in fact present opportunities to the likes of Unica Capital.

Our solid financial position allows us to take advantage of falling asset prices to boost the size, breadth and quality of our portfolio in order to capitalise on a long-term commercial property strategy.

If a recession takes place, this could lead to a slowing rate of rental growth, lower occupancy levels and higher default rates. With recent acquisitions reaching £300M over the last year, consisting primarily of Prime AAA office accommodation and with little to no exposure to mature, low-yielding London offices, Unica’s portfolio consists of high-quality assets that are likely to perform well during, and after, an economic downturn.

Our office properties, for example, are energy efficient and well located in central London’s most desirable locations, including Westminster, Victoria, Soho, Mayfair and the City. These are locations that are likely to experience robust demand even during a period of economic decline. Similarly, our retail assets are situated in the prime shopping centres of Oxford Street, Mayfair, Soho and Westminster – areas that are less likely to be vacated by major brands who are seeking to rationalise their portfolios as online retailing grows in popularity, but who still want a flagship or high-profile physical presence.

With energy efficiency, prime location and high-quality spaces a focus, coupled with a strong financial position, even in what looks like turbulent times there are opportunities to be had that are likely to be very rewarding for investors.