Central London offices to generate good returns in 2011, says Cluttons

LONDON: The Central London property market is expected to retain its appeal in 2011 for investors seeking safe and transparent markets in the face of economic and financial volatility, said Bill Siegle, senior partner of London-based real estate consultancy Cluttons LLP.

Siegle singled out West End offices in Central London as good potential investment with a projected rental growth of about 8% and about 15% growth in capital values and total returns in 2011.

“A severe shortage of quality office space in the West End, as a result of constraints on development finance and a restrictive planning regime, will continue to frustrate occupier demand, driving further pressure on rental growth,” said Siegle.

Furthermore, a limited supply of investment stock combined with strong demand from investors seeking exposure to both the positive economic story and the traditional security of the West End market, will continue to underpin yields, he added.

According to Siegle, Central London offices are expected to deliver total returns twice that expected for the sector in the rest of the UK where public sector spending cuts and a slower return to economic growth will dampen both rental growth and investor demand.

In 2010, the West End office market showed a tremendous return to strength with prime rents growing by over 6% over the year to reach £90 (RM441) psf in the Mayfair core.

Driven by improving occupier demand, particularly from within the hedge fund sector, the rental take-up during 2Q to 3Q 2010 was in excess of the six-year average, recording a vacancy rate of sub 6%.

Investment demand for offices in the West End also grew steadily during 2010 resulting in a 10% increase in investment volumes over the last six months alone, totalling close to £2 billion.

“This has driven yields lower to 4.25% for Grade A space in the prime core. Falling yields combined with the acceleration in rental growth will deliver a total return in 2010 of over 20%,” said Siegle.

The West End office market area extends to Euston Road to Millbank from north to south, and Park Lane to Charing Cross Road/Kingsway from west to east. The area includes the sub-markets of Mayfair, Covent Garden, St James’s, Noho, Soho, Marylebone and Victoria.

Siegle cautioned that continued uncertainty in the financial markets, reflecting sovereign debt concerns in Europe present some risks to Clutton’s forecast.

“However, the UK and Central London in particular is well placed to benefit from a global and domestic economic upturn having taken early and decisive action on its own deficit,” said Siegle.

This article appeared on the Property page, The Edge Financial Daily, January 21, 2011.

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