London commercial property rents rise in 2015

New analysis has discovered that a growth in commercial property rents across the capital drove average total returns of 18.1% from investments during 2015.

The London markets analysis report by Levy Real Estate and MSCI looked at more than £30bn worth of assets across 20 prominent submarkets. This research found that rental growth in the capital increased year-on-year from 7.8% in 2014 to 8.5% in the last twelve months.

Capital growth

Rental growth in London during 2015 was found to be strongest in the Camden/King’s Cross Central submarket. The success of the King’s Cross Central development saw rents grow by an average of 17%.

Large occupier demand and a lack of room in other submarkets was also found to be driving rents. In Mayfair, the continued conversion of office property to residential homes has cut supply of new space and caused rental growth of 11.9% in the last year.

Simon Hellpern, Levy Real Estate Investment Partner, noted, ‘the latest research shows a market which still has significant momentum. Returns are now increasingly being driven by a growth in rents and this suggests that London’s commercial property investment sector can expect further sustainable growth in values.’[1]

London commercial property rents rise in 2015

Greatest returns

Progressive rents in and around King’s Cross meant that the Camden and King’s Cross saw the highest return for a single submarket of 27.3%. This was followed in the total returns rankings by the Eastern Fringe with 24.7% and Marleybone and Euston at 23.1%.

Mayfair retained its rank as the submarket with the highest valued property, but the typical equivalent yield here was just 3.7%. The largest inward yield shift in the last year was in the Western Fringes of Clerkenwell, Smithfield and Farringdon, where average yields rose 80 basis points to hit 5.2%. However, the larger picture shows a slowing in yield shift, which highlights the importance of rental growth.

Attractive

Colm Lauder, MSCI vice president, noted, ‘the London investment market had another good year in 2015, with strong returns on the back of healthy rental value growth across the commercial property market. As in 2014, fringe markets outperformed last year with locations such as Camden/King’s Cross and the Eastern Fringe remaining attractive to both occupiers and investors.’[1]

‘Pricing in the London market also strengthened further during the course of 2015, but the rate of yield compression has slowed as key market locations begin to reach record yield levels which question price fundamentals. This has resulted in rental growth taking over as the main performance driver, as confident and expansionary, businesses compete for space,’ Lauder went on to say.[1]

[1] http://www.propertywire.com/news/europe/london-commercial-property-rents-2016030211623.html