London’s Prime Office
London‘s Prime Office Market Outlook for 2024
In the ever-evolving landscape of the commercial real estate market, 2023 was marked by challenges stemming from soaring interest rates. However, 2023 proved to be a year of opportunity for those with liquidity, and with nearly 30% of 2023’s total deal flow happening in December, market sentiment has shifted to a positive outlook for 2024, for some of us at least.
The expectation that the Bank of England would start to lower interest rates in Spring may be premature, given last weeks news of higher than expected inflation. Those waiting for access to cheaper borrowing will have to hold out a little longer. With uncertainty still hanging over the sector, it will be another year of opportunity for investors with liquidity.
Expectations the Bank of England will eventually start to lower interest rates later this year may come too late for some investors. With interest rates now expect to stay higher for longer, the property sell-off will continue for a while at least. As we step into the first half of 2024, the property investment trends set in motion in 2022 and 2023 are expected to continue. Unherd points out, “Keep the lights on until 2025 and wait for the cavalry of easier money and a resurgent economy to appear on the horizon. Until then, amid low occupancy and cash burn from high-interest rates, wait for rates to come down and for people to return to the office and shopping centres.” This situation paradoxically opens up more opportunities for those of us holding cash reserves.
The continued availability of discounted London office deals, as reported by Bloomberg, reflects the pain borrowers and lenders face, but also signifies a golden opportunity for those with liquidity looking to invest in prime office spaces in 2024. With the supply and demand imbalance continuing to be a driving force behind rental growth, as highlighted by CBRE’s Real Estate Market Outlook for 2024, there will be plenty of desirable properties at reduced asking prices continuing to come onto the market.
This situation is exemplified by the amount of Middle Eastern and Asian investors who have come to the London market during 2023 “Middle Eastern investment into central London offices is the busiest it has been since before the pandemic,” notes research from BNP Paribas Real Estate. This trend has been further reinforced by the words of James Carrington, head of City investment at BNP Paribas Real Estate, who mentioned that “central London commercial investments have become more attractive in recent months to overseas buyers.“
With interest rates now expect to stay higher for longer, London is set for an influx of foreign investment, so a word of warning to those dipping their toe into the market. They should not underestimate the importance of knowing and understand the finer nuances of the London real estate market. Contacts and partnerships that have been cultivated over many years put Unica Capital in an enviable position, with the ability to react quickly and secure off-market deals.
Despite the many challenges, London’s economy is adapting post-COVID, with a renewed focus on quality, sustainability and accessibility. Properties like Poland Street, Cork Street, and Great Smith Street which are delivering high quality prime office space in sought after locations are exemplars of this trend.
The return to the office appears to be well underway, as an ever increasing numbers of businesses demand their workforce return to the office at least 2 or 3 days a week. U.S. headquartered companies adopting a return-to-office policy in the UK are leading the way. This ties in with news that office leasing activity in London was at it’s highest level since 2018 – Activity was 93% higher in the second half of 2023 compared to the first half.
News of the cancelled HS2 2nd phase has already affected the market in Manchester and Birmingham. In contrast, London consistently presents itself as a secure option for strategic investment. A prime example of this is news London already outpacing both these cities (and the rest of the UK) on services exports. Between 2016 and 2021, London’s services exports have grown by 47% to reach £152.2bn. Exports from the UK’s second- and fourth-largest services-exporting cities – Manchester and Birmingham – did also grow, but at much slower rates of 11% and 3% respectively. London will increase it’s share of the market if cities like Manchester and Birmingham do not take drastic action.
With demand for well-connected, high-quality prime office spaces in mixed-use locations within London remaining strong for the foreseeable future, and with construction delays and a current shortage of prime stock, it is predicted there will be a shortfall of 13 million square feet of office space in the City of London by 2040, as reported by The Straits Times. This demand highlight the real potential of growth for those with a long-term investment strategy.
Unica Capital predicts that those who have liquidity and the ability to act fast in this market will thrive in 2024. Energy-efficient upgrades attract tenants, location, and quality are paramount, and the ability to adapt and seize opportunities is crucial. While the outlook for 2024 is cautiously optimistic, those with liquidity, and the ability to act swiftly when opportunities arise are looking forward to a busy and productive year. With market sentiment improving, but the expected decrease in interest rates on hold for now, a host of landlords will be looking to offload further assets. Staying vigilant, seizing opportunities as they arise and priming ourselves to capitalise on emerging market trends as they happen will be the key to success in 2024 and beyond.
Published: January 25 2024
Author: Byron Baciocchi