UK offices have delivered inflation-beating returns for the past 70 years, according to research by Knight Frank.
Total returns, including capital growth and income returns from tenants, have averaged 8.3% per annum, compared to average inflation of 5.1% pa since 1952.
During this period, offices have provided a remarkably stable inflation hedge for investors and landlords, delivering an average 5.6% income return.
Philip Hobley, head of London offices at Knight Frank, said: “The UK’s relative stability, strong legal system and market liquidity in the office sector continues to compare favourably with other assets in the eyes of long-term investors. Real estate’s long-term performance against inflation underlines its attraction as an inflation hedge.”
He pointed out that, even in the relatively high-inflation period of the 1970s, offices provided an average annual total return of 3.9% above inflation.
Over the past decade, capital appreciation has easily outstripped inflation, with asset value growth averaging 4.3% each year, compared to a 2.6% inflation rate.
Shabab Qadar, London research partner at Knight Frank, said: “Compared with previous decades, there are fewer speculative office developments in the pipeline and, combined with rising demand for best-in-class buildings, this suggests we are likely to see rental tension, particularly in core London submarkets. We expect offices to maintain its inflation hedging characteristics as the supply-side of the prime market becomes increasingly constrained and while the increasing diversity of the occupier base adds an extra layer of resilience in times of economic distress.”
This resilience could become more pronounced as office buildings with green rental premiums and strong lease agreements attract capital from institutions seeking a hedge against inflation.
Qadar added: “ESG agendas mean that demand will be concentrated on London’s green-rated buildings, which can command between a 3% and a 13% rental premium, depending on their rating, and a 10% sales premium. Future growth will also be driven by sustainable, mixed-use schemes materialising in new emerging submarkets, previously dominated by residential developments, as the emphasis on living, working and recreation in the same neighbourhood grows stronger.”
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