Our views

Office Politics: UK property market update


Keith Miller, Senior Fund Manager, Head of Offices

8 August 2017

The UK commercial property market remained stable during the first half of the year, despite political events. Brexit concerns are clouding the horizon of Central London office demand, and we have seen headline rents decline in the sector. However, overseas investment continues to be supported by sterling weakness, with Asian investors dominating the market and completing numerous high-profile deals in recent months, including the £1.3bn acquisition of 20 Fenchurch Street in the City (known as the ‘Walkie Talkie’ building) and the £1.15bn purchase of the Leadenhall Building (the “Cheesegrater”). We are also seeing increased activity from European investors, with German funds investing around £980m in the City in the first half of 2017, compared to just £160m during the whole of 2016.  Pricing has recovered, having suffered downward pressure last year.
Meanwhile, the occupational market in Central London has become more challenging. Availability has risen and take-up has fallen over the last 12 months, particularly in the banking and finance sector. The market is also becoming increasingly polarised: supply of high quality newly built or refurbished City accommodation is very low, while second-hand availability is on the rise, putting downward pressure on rents in many cases. 

The UK commercial property market remained stable during the first half of the year, despite political events. Brexit concerns are clouding the horizon of Central London office demand, and we have seen headline rents decline in the sector. However, overseas investment continues to be supported by sterling weakness, with Asian investors dominating the market and completing numerous high-profile deals in recent months, including the £1.3bn acquisition of 20 Fenchurch Street in the City (known as the ‘Walkie Talkie’ building) and the £1.15bn purchase of the Leadenhall Building (the “Cheesegrater”). We are also seeing increased activity from European investors, with German funds investing around £980m in the City in the first half of 2017, compared to just £160m during the whole of 2016.  Pricing has recovered, having suffered downward pressure last year.

Meanwhile, the occupational market in Central London has become more challenging. Availability has risen and take-up has fallen over the last 12 months, particularly in the banking and finance sector. The market is also becoming increasingly polarised: supply of high quality newly built or refurbished City accommodation is very low, while second-hand availability is on the rise, putting downward pressure on rents in many cases. 

Source: CBRE Research

However, with no major Brexit-inspired relocations of staff yet to be announced by City financial institutions, the change in supply and demand has so far failed to have a significant impact on vacancy rates, which remain generally low.

While from a sector perspective we continue to favour industrials over offices and retail in the short term, we remain positive about London’s long term prospects and continue to invest in a number of Central London redevelopment schemes. Global allocations to real estate are expected to increase, and demand for ‘safe haven’ assets remains strong; these factors, combined with the low interest rate environment, should sustain UK property yields around their current levels over the short term.  We remain alert to negative sentiment concerning Brexit, but note overseas buyers have so far been happy to look beyond short-term uncertainty, attracted by weaker sterling and London’s longer term growth potential and its position as a world leading city. 

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.