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.