Between 1939 and 1988 London’s population shrunk by 22%, as the second world war drove people out of the city. By the 1970s the capital was a bleak place.
No wonder, then, that when the late 1980s property crash struck, City of London vacancy rates soared to almost 20% and rents fell by 30%. Combined with a recession there was simply not the momentum to soak up the huge over-supply.
Why is this relevant now? Because there is talk of the property market overheating, and while the sector has enjoyed a strong run coming off a low base in 2009, with values only just recovering their 2008 peaks some are expecting trouble ahead.
But I am more confident for a number of reasons, the first being population and jobs growth. In 1991 London’s population was 6.9m. By 2001 it had grown to 7.2m and by 2011 to 8.2m. London’s population is now 8.6m, with the London Plan predicting the capital will grow by 100,000 people a year for the next 10 years.
According to Oxford Economics, the knock-on effect is that 200,000 new office jobs are due to be created in the next five years, needing another 20m sq ft of office space.
Not only that, but the “war for talent” means companies want to offer employees the best accommodation too.
The Central London office vacancy rate is now around 4.5% of total stock and at 10m sq ft this is equivalent to less than one year’s supply at present levels of take-up.
Nor is that supply tap likely to be turned on soon. According to research published last month by Arcadis, London faces a “severe market imbalance” threatening the viability of schemes, with building costs overall reckoned to be rising by at least 10% pa.
Commodity prices are falling, but with an 850,000 shortfall in the workers needed in the UK construction sector, some developers may struggle to obtain a viable price and a willing contractor.
Also, bank lending is much more constrained now than 10 years ago, with banks wanting to see considerably more equity invested up front by the borrower, meaning loan to value ratios are at more conservative levels.
But there are some clouds on the horizon in 2016 which we cannot ignore.
London’s infrastructure is creaking and struggles to keep up with demands placed on it.
With the US Federal Reserve finally raising interest rates, the Bank of England may follow suit before the end of the year.
Uncertainty remains over China and other emerging economies, and a falling oil price could see the repatriation of some overseas investments by sovereign wealth funds. On the other hand, London has always been a safe haven for these investors in times of trouble.
There is also uncertainty over the European Union referendum, although I believe that whether Britain exits the EU or not the fundamentals supporting London real estate mean we are well placed.
We are unlikely to see further yield compression, but against the backdrop I have outlined, office rents across London should rise by 5%-10% in 2016. There is simply too much demand and too little supply to predict any other scenario.
