The commercial property market ended 2014 on a strong note particularly in London. There is evidence that there has been a surge in the popularity for regional cities which were hit hard during the downturn - but there are still areas of the country where activity remains slow.
As far as location in London is concerned, demand remains strong for good quality City offices, and continues to outstrip supply. There are a lot of cranes around the City which we can see from the roof of our 46 New Broad Street office. This means that the supply of office space will increase once the office buildings are completed and come on to the market, which could then mean that supply and demand are evened out. Whilst demand outstrips supply at present, rental grown is healthy and increases are anticipated this year.
However, the rental market outside the prime areas is also stronger, with tenants happy to move out to City fringes with good transport links and an infrastructure. For example, I have a number of clients in the office furniture business who are moving to Clerkenwell (a 20 minute walk from Liverpool Street Station) where the rental for showrooms is still affordable. However, Warwick Bookman, a leading agent in this field, believes that there are ‘too many rabbits chasing too little food’.
There is an undoubted trend towards higher density which means that there is a forecast of at least 6% in rental growth. Coupled with the lack of supply, and increase in new start-ups, the serviced office market is particularly buoyant and will remain so this year.
Thus, a continuing lack of supply will drive office investment to record levels, although this may slow because of electoral uncertainty hitting investor confidence, at least until after 7 May 2015. All commentators speak of the forthcoming General Election as being the hardest to call in living memory. There also remains uncertainty in the market because banks are continuing to have stringent lending criteria.
Foreign investors continue to be attracted to come to this country, with a particular focus on London, and are still prepared to pay more than the home investor. It is anticipated that there will be a significant amount of European money targeting commercial real estate in London. It was shown last year that following upheavals in Russia there is a preference for investing in this country, which of course will remain outside the Eurozone. It will be interesting to see whether there is a capital outflow to this country as a result of the recent election in Greece. It is anticipated that the European Central Bank announcement of the massive buyout of government debt to revive the moribund Eurozone economy will only be good for the United Kingdom.
So the outlook could be good. The investment market will continue to prosper and rental markets should achieve growth. However, there are a number of unpredictable points. The result of the election, possible overheating of the rental market, an increased amount of new builds coming on to the market so that supply and demand even up, and the fact that many people believe that we are getting to the middle of an economic cycle – in reality, no one can predict with any certainty how the real estate market will perform in 2015.