Knight Frank has predicted that 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 box), 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 that City rents would grow by 2.3% pa from 2016 to 2020, while CBRE has told clients privately that it expects rents to fall by 2019 following several years of growth.
Cluttons head of research Faisal Durani predicted the City was “on the cusp of moving from a supply-demand imbalance to a potential supply glut” that 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 much of the 2019 pipeline remains uncertain, with factors including development finance, construction cost inflation and fears of oversupply likely to delay developments that have yet to start.
Nick Braybrook, head of City capital markets at Knight Frank, said: “Some commentators say that London is building far too much office space. This is simply wrong.”
Knight Frank estimates that 6.7m sq ft that has not yet been leased will be completed by the end of 2018. Average take-up over the period would total 14.1m sq ft.
Knight Frank head of City agency Dan Gaunt said: “Cranes can be misleading. That threatening chart for 2019 is a natural break on overdevelopment. 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.
The looming EU referendum is also widely expected to affect rental growth. However,
Richard Proctor, who leads Knight Frank’s tenant rep team, which last year advised on more than 555,000 sq ft of acquisitions, said no clients had raised Brexit concerns.
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