London real estate to do well this year, reinforced by commercial and residential products

KUALA LUMPUR: Bolstered by the demand for commercial and residential real estate in Central and West End London, the UK capital’s real estate market is expected to continue to perform well in 2014, said the country’s property experts.

According to Dr Megan Walters, head of research for Asia-Pacific capital markets at Jones Lang LaSalle, both commercial and residential sectors remain popular.

Walters was presenting her paper, “UK & London Investment Outlook 2014” at the Investing with Insight-UK Real Estate talk co-organised by Addleshaw Goddard and the British Malaysian Chamber of Commerce (BMCC) yesterday.

“What’s driving the UK and in particular, the London real estate market, is employment growth,” said Walters.

She noted that the UK has a net flow of people coming in. “Additional school-leavers, longer-working employees and women participating in the work force are all contributing towards the country’s global pool of talent and [are] thus driving the demand for office space.”

Commercial rental rates in London’s west corridor, city centre and West End will remain landlord favourable in 2014 and 2015 with the west corridor commanding rentals of £29.30 (RM159.58) per sq ft (psf) and the city centre and West End posting rentals of £58.50 and £100 psf respectively.

In the residential market, Walters said the growing population of Asians who are buying houses coupled with a perpetual undersupply of houses are spurring the UK residential market forward.

“The Asian economies continue to perform well and they continue to strengthen against the pound and that has made it cost effective for Asians to buy in the UK,” she said.

“Also, the UK housing supply is about half the rate of natural household formations. Theoretically, household formation is about 250,000 units per year, but we’re only building 120,000 housing units a year so there’s a constant undersupply of housing.”

Meanwhile, the commercial market is seeing real growth spurred by the emergence of new tenants brought on by rising employment within the financial services sector, said James Petit, managing director and head of real estate UK and Ireland at Deutsche Asset & Wealth Management.

According to Petit, commercial supply has been muted over the last five to six years, so it will take another two to three years for supply to catch up with the demand witnessed in those periods,

“You will see demand pushing the market as rents will grow and returns will be enhanced by rental growth,” said Petit.

Residential properties at the top end of the market in Knightsbridge and Mayfair are reaching their peak, and Petit  doesn’t foresee any fears of that market receding primarily because of the amount of money coming in.

“If you look at the number of transactions done, it’s a very small market so it doesn’t need[many] people entering the London residential real estate market to see those prices maintained,” said Petit.

Petit said the lower tier markets are projecting real growth from inward migration from domestic population as the young are moving back into the city, coupled with the migration of foreigners into the UK.

According to both Walters and Petit, the Crossrail line will be driving the market forward.

The 42km Crossrail tunnels will connect existing rail networks beneath London. The Crossrail route will link Maidenhead and Heathrow in the west and Shenfield and Abbey Road to the east with new underground stations at Paddington, Bond Street, Tottenham Court Road, Farringdon, Liverpool Street and Whitechapel.

“The Crossrail line is changing the rental patterns across the city. It’s increasing values in particular areas and it’s acting as a catalyst for development,” said Walters.

Some of these areas are Canary Wharf, White Chapel, Custom House, Famden and Ealing Broadway.

“When the infrastructure opens up, there will probably be some people who will have their eyes on the real estate along the Crossrail line. The general public has not picked up what the Crossrail will mean to their lives, but I think it will change their lives. It’s going to be a fantastic piece of infrastructure,” said  Petit.

Rents in areas such as Mayfair and Knightsbridge are expected to accelerate, driven by the demand from technology, media and telecommunication companies.

“Banks have been the traditional driver of rents in London. This has now changed as banks [go through] some of the issues from the global financial crisis and learn to reduce their cost space. So now, the drivers for high rents are the TMT companies,” said Walters.

Rents are expected to rise 5.7% in the city from 2014 to 2017, and 5.5% in the West End.

Outside London, rents are doing well in Bristol and Manchester where the British Broadcasting Corp (BBC) is based along with universities and creative industries.

Walters and Petit were among the six speakers at the talk. The other speakers included Leona Ahmed, partner at Addleshaw Goddard, Siobhan Godley, partner at Deloitte Real, and Joel Hernandez and James Hill, partners at Mourant Ozannes LP.

Established in 2003, Addleshaw Goddard LLP is a corporate law firm based in London. It has some 750 lawyers, with offices in Leeds, London and Manchester. BMCC is a Kuala Lumpur-based networking chamber that has been providing Malaysian businesses with networking, knowledge exchange, bilateral trading assistance and support since 1963.

This article first appeared in The Edge Financial Daily, on March 21, 2014.

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