The turnaround in investor demand over the last six months has put the performance of commercial property over the last year back into positive territory. This is something that few would have expected only a few months ago.
The Investment Property Databank (IPD) has pointed to a 4.5% capital value increase since June this year, following a 45% fall over two years. But this understates the sharp rise in value of prime central London office assets. Recent interim reports from developers such as British Land and Great Portland Estates have reflected the positive tone struck by IPD. This has prompted a number of major property companies to announce that they plan to spend opportunistically in core sectors, particularly central London offices.
Key drivers of investor demand include low bond and cash yields and cheap finance - at least for those who can find it. The weakness of sterling has also been a huge factor in attracting inward investment. The increase in office take-up is being driven, too, by the desire of tenants to take new space before rents start to rise again and a growing confidence that office rents in London are at or close to the bottom. The limited supply of new development in all sectors and the lack of fire-sales by banks that some were expecting have also been major factors
The clear signs that the property investment market is past the worst are reflected in the total returns for UK commercial property which over the quarter have seen some of the biggest ever recorded increases. While the shape of the recovery remains uncertain, against a background of forthcoming debt maturities and continuing rental falls in some sub sectors, there is little doubt that, whilst opportunities are scarce, those that are available remain highly attractive for investors and in demand.
A key characteristic of this quarter has been a material shift in sentiment in the leasing market. The supply of Grade A space is falling, with little in the development pipeline. This has created a shortage of Grade A space across London, a trend likely to be exacerbated as we go into 2010. As a result rent free periods are showing signs of reducing and it is expected that this will have an effect on Grade B space. Whilst strong rental growth is not yet on the agenda we have at least seen the bottom of the market on incentives.
Although take-up in the City in the final quarter of 2009 was down from I.2 m sq ft to 789,000 sq ft from the previous quarter this represented a robust performance given that the previous quarter took in the massive Nomura deal.