Knight Frank has predicted office rents in central London will continue to rise over the next three years, dismissing concerns about looming oversupply as a “red herring”.
The firm’s bullish outlook – which is especially notable in the City (see table) where sharp supply increases are more likely given the scale of consented developments – is in stark contrast to more bearish forecasts by rival agents.
Savills’ latest forecast predicted City rents would grow 2.3% pa from 2016-2020 while CBRE has privately told clients it expects rents to begin falling by 2019 following several years of growth.
Cluttons head of research Faisal Durrani has predicted the City is “on the cusp of moving from a supply-demand imbalance to a potential supply glut”, which would “dampen rental value growth”.
Average take-up of new and refurbished space in central London is around 4.7m sq ft annually, however the influential Crane Survey published by Deloitte Real Estate forecasts that 7m sq ft of space will complete in 2017, rising to 8m sq ft in 2018 and just under 8m sq ft in 2019.
Knight Frank’s bullish view stems from the fact that 42% of the space under construction is already prelet and that much of the 2019 pipeline remains uncertain, with factors including development finance, construction cost inflation and fears of over supply likely to delay developments which have not yet started.
Knight Frank head of City capital markets Nick Braybrook said: “Some commentators say that London is building far too much office space and is about to experience an over-supply – this is simply wrong.”
Knight Frank estimates 6.7m sq ft of new and refurbished space which has not yet been leased will be completed by the end of 2018. If take-up is in line with the long-run average over the period it would total 14.1m sq ft.
Head of City agency Dan Gaunt added: “Cranes can be misleading. That threatening chart for 2019 is a natural break on over-development, it is just a red-herring.”
With most analysts predicting rental growth will drive returns in London and the UK this year as capital growth slows, the debate is central to many investors’ strategies for 2016.
Macro-economic threats and political uncertainties such as the looming Brexit have also been citied by commentators as potential threats to occupier sentiment and therefore rental growth.
However Richard Proctor, who leads Knight Frank’s central London tenant representation team, which last year advised on the acquisition of over 555,863 sq ft of office space in the capital, said thus far no clients had raised Brexit concerns as an issue.
| Knight Frank rental forecasts: | ||
|---|---|---|
| Core West End | ||
| 2015 | £115 | +7% |
| 2016 | £117 | +2.2% |
| 2017 | £120 | +2.1% |
| 2018 | £122.50 | +2.1% |
| 2019 | £122.50 | 0% |
| 2020 | £122.50 | 0% |
| City | ||
| 2015 | £70 | +12% |
| 2016 | £75 | +7% |
| 2017 | £78 | +4% |
| 2018 | £79.50 | +1.9% |
| 2019 | £80 | 0.6% |
| 2020 | £80.50 | 0.6% |
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