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News

22 August 2001

London has led the property recovery in Europe, but with a General Election looming, the investment climate could be set to change. Overseas investors are so far undetered.

Following sterling’s withdrawal from the European exchange rate mechanism in September 1992, London experienced a brief mini-boom on the back of the devaluation of sterling. The effect on the property market was substantial, if short-lived: values moved up significantly in 1993, boosting total returns into 1994.

Last year was disappointing, however. Capital values fell by 2.5% in the London office market, and total returns were only around 5%. There has been no real evidence of rental growth, although a handful of top-of-the-market deals in recent weeks has begun to improve market sentiment.

Analysing the London office market as a single location is impossible: the characteristics and performance of the market vary substantially between the West End, the City, Midtown and Docklands.

Take-up of office space is improving in all sectors of the market, with the vacancy rate throughout central London dipping to 10.4%. Docklands remains by far the most difficult market, with a vacancy rate of 23.4%. In the City and West End, by contrast, vacancy has fallen below 10%.

While rents are beginning to improve, there has been no wholesale return to the standard 25-year lease. Most new leases are being signed for a period of 15 years, and are subject to less onerous privity of contract obligations, following last year’s change in the law.

In all areas, the legacy of over-rented properties is creating a two-tier investment market. High-yielding buildings let at rents that are up to twice current market values are proving particularly attractive to overseas investors, with the German open-ended funds continuing to set the agenda.

The prospect of a Labour government has so far failed to deter foreign investors, but observers of the property market are beginning to wonder what the implications might be. A General Election must be held by next spring at the latest, and with the Labour Party well ahead in the opinion polls, a change of government is widely anticipated.

While none of the political parties has unveiled specific proposals, taxation will be one of the central issues of the election. The favourable tax status afforded to overseas property investors could be one of the first areas to come under scrutiny; currently offshore investors pay no capital gains tax and can offset interest on borrowings against income and withholding taxes.

The UK’s ambivalence about the European Union could also become a significant handicap in the run-up to European monetary union in 1999. London’s traditional position as the largest financial centre in Europe is, for now, unassailable. But investors may favour Frankfurt or Paris if the UK continues to stand apart from the rest of Europe.

Regardless of the outlook for investment, the capital is well into its next development cycle: cranes and scaffolding are becoming a familiar part of the landscape once more, and there is a more than 400,000 m2 of office space under construction.

London has led the property recovery in Europe, but with a General Election looming, the investment climate could be set to change. Overseas investors are so far undetered. Following sterling’s withdrawal from the European exchange rate mechanism in September 1992, London experienced a brief mini-boom on the back of the devaluation of sterling. The effect on the property market was substantial, if short-lived: values moved up significantly in 1993, boosting total returns into 1994. Last year was disappointing, however. Capital values fell by 2.5% in the London office market, and total returns were only around 5%. There has been no real evidence of rental growth, although a handful of top-of-the-market deals in recent weeks has begun to improve market sentiment. Analysing the London office market as a single location is impossible: the characteristics and performance of the market vary substantially between the West End, the City, Midtown and Docklands. Take-up of office space is improving in all sectors of the market, with the vacancy rate throughout central London dipping to 10.4%. Docklands remains by far the most difficult market, with a vacancy rate of 23.4%. In the City and West End, by contrast, vacancy has fallen below 10%. While rents are beginning to improve, there has been no wholesale return to the standard 25-year lease. Most new leases are being signed for a period of 15 years, and are subject to less onerous privity of contract obligations, following last year’s change in the law. In all areas, the legacy of over-rented properties is creating a two-tier investment market. High-yielding buildings let at rents that are up to twice current market values are proving particularly attractive to overseas investors, with the German open-ended funds continuing to set the agenda. The prospect of a Labour government has so far failed to deter foreign investors, but observers of the property market are beginning to wonder what the implications might be. A General Election must be held by next spring at the latest, and with the Labour Party well ahead in the opinion polls, a change of government is widely anticipated. While none of the political parties has unveiled specific proposals, taxation will be one of the central issues of the election. The favourable tax status afforded to overseas property investors could be one of the first areas to come under scrutiny; currently offshore investors pay no capital gains tax and can offset interest on borrowings against income and withholding taxes. The UK’s ambivalence about the European Union could also become a significant handicap in the run-up to European monetary union in 1999. London’s traditional position as the largest financial centre in Europe is, for now, unassailable. But investors may favour Frankfurt or Paris if the UK continues to stand apart from the rest of Europe. Regardless of the outlook for investment, the capital is well into its next development cycle: cranes and scaffolding are becoming a familiar part of the landscape once more, and there is a more than 400,000 m2 of office space under construction.