Safe havens: London

THE London office and retail property markets were the strongest performers in the UK this year, delivering both upward rental growth and hardening yields. Shortages of Grade A units in prime locations combined with a pick-up in tenant demand to deliver upward rental growth of 3% to 5% in the office market in 2012. Prime retail rents rose to record levels in London's top shopping streets such as Bond Street.

Risk aversion around the world and in particular in the eurozone will continue to drive investors to the safe haven of London in 2013. We expect the technology, media and telecoms businesses to be active in the London office market as occupiers, and a continued influx of international retailers in the retail market. Prime office yields in the city of London will remain under downward pressure and in the West End, they will remain stable at around 3.75%.

International investors will continue to focus on prime office and retail buildings with high-quality tenants and long leases in the city and West End core. Domestic investors and some opportunity funds will be looking to acquire refurbishment and redevelopment opportunities at higher yields so as to deliver high returns as the market cycle moves in their favour.

The biggest challenge for the London office market in 2013 is legislative and fiscal. The political desire to ensure a global financial crisis does not happen again could lead to overtight regulation and taxation of banking and financial services.

This story first appeared in The Edge weekly edition of Dec 24-31, 2012.