Executive summary
This report highlights the current market for investment and occupation in London’s prime real estate sector with a specific focus on office, retail, and mixed-use properties. This report provides an extensive analysis of the economic climate in London, key points about the London real estate market, and specific information on prime office and retail markets.
Evidence and market reports show that prime office and retail markets are primarily in areas like St James’s, Mayfair, the City of London, and Knightsbridge. The report also provides lives examples from the market, such as new properties coming on the market, present rental values, available space for occupation, yields, and recent sales. The report also issues examples that show the current occupier/investor appetite within London about trends in supply and demand. The report recommends that the investors consider prime office and retail markets for investment and occupation opportunities. This is because they are likely to have strong returns.
Introduction
London is one of the best commercial centers in the world. Investors, especially in real estate, mostly prefer investing in the city. The prime office market in London is mainly in St James’s, Mayfair, and the west end. These areas are the best for businesses and offer exceptional office spaces that are easily accessible with excellent connectivity. On the other hand, the prime retail market is mainly in Oxford Street, Covent Garden, regent street, and Knightsbridge, the leading retail destinations in the city. Live examples include retail properties and new offices coming into the market, current rental values, available spaces for occupation, and current yields and sales. This report will provide an extensive overview of London’s prime office and retail markets alongside live examples and insights into the market dynamics. The information is essential in ensuring the investor makes informed decisions on investment and occupation opportunities in the London real estate market.
Economic Overview of the London Real Estate Market
The London real estate market is one of the most diverse and dynamic works. It draws various domestic and international investors and occupiers owing to its excellent infrastructure, global financial and business center, and cultural offerings. This section aims to provide an overview of London’s current economic climate and its effect on the real estate market (London & Partners, 2022).
The London economy is robust and diversified. The city has a Gross Value Added (GVA) of an estimated £364 billion, contributing about 22% of the country’s GVA. Many well-known financial institutions in London generate wealth and employment opportunities. London is also a center for creative industries, tourism, and higher education, contributing significantly to the economy.
The Q4 2017 UK commercial property market survey shows that the general retail property market in the UK had stable conditions, with a balance of +17% of respondents stating an increase in occupier demand. On the other hand, the retail sector had negative sentiment owing to the rise in online shopping and reduced consumer spending. (Knight Frank, 2022) offers additional insights into the London real estate markets about lease events such as rent reviews and expirations. The report shows that the market for prime offices has been robust, with the rent increasing in some areas. However, the retail sector offers many challenges with high vacancy rates and reduced rent (Knight Frank, 2022).
The Q3 2017 UK Commercial Property Market Survey by RICS also explains the challenges the retail sector faces, with a balance of -33% of respondents highlighting a reduction in the demand for retail property. The industrial sector, however, has remained strong, with a balance of +31% of respondents explaining that there has been a high demand for industrial property (RICS. 2017).
One of the most serious challenges facing the London real estate market is Brexit uncertainty. The UK departed from the European Union, leading to economic uncertainty and negatively affecting investor confidence (London & Partners, 2022). However, the market continues to be resilient with the demand for prime office and retail spaces, especially from international investors looking for safe investments for their capital.
Despite the challenges, the London real estate market remains attractive to investors due to its strong fundamentals. In 2021, the prime office rents in London West End were £ 120 per sq. ft. 2021, one of the highest in the world. This was due to the demand from the technology and financial sectors. Retail rental values in critical locations such as Regent Street ad Oxford Street remain strong, with high demands from flagship and luxury brands (HM Revenue & Customs, 2022).
The government has implemented measures and policies to improve the country’s economy. An example is the Bank of England’s interest rate of 0.1%. This is low and has thus positively impacted the real estate market by making it easy to lend money. This has, in return, increased the demand for commercial real estate (Knight Frank, 2022). The government also put measures to cushion people from Covid 19, including furlough and business rate relief. This has offered immense support to the real estate market. However, the effect of Brexit on real estate is unpredictable, mainly due to the likelihood of changes in trade agreements and immigration policy (HM Revenue & Customs, 2022).
The emergence of Covid 19 pandemic led to an increased preference for remote working primarily due to the containment measures. Serviced offices and co-working spaces have been very popular since then as they reduce costs and increase flexibility (Knight Frank, 2022). There is also an increase in the trend of mixed-use properties with many amenities such as retail, residential, and office space. The remote working and mixed-use properties trend provides new opportunities to developers and investors (HM Revenue & Customs, 2022).
The London Real Estate Market.
The London real estate market is ever-changing. The factors that affect the demand and supply of properties in the city include a high demand for modern offices in London. There are many businesses and organizations in London that need modern spaces that are well-equipped to suit their daily operations. This has led to an increase in the focus on developing commercial properties and new office buildings, with most developers and investors wanting to maximize modern consumer demands (JLL, 2020).
In addition, the demand for retail properties has grown in the city. The city’s growth has led to a significantly increased need for retail shops for visitors and residents. This explains why there is so much the development of new retail properties is the center of attraction. This has also increased the focus on upgrading and renovating the present retail spaces to address the demands and needs of modern consumers (CBRE, 2021)
In addition to the high demand for office and retail properties, the London real estate market is also affected by factors such as the economic climate and availability of resources. There are several developers and investors interested in London’s real estate. Therefore, the need for increased capital that can help support new projects and developments is growing RICS. (2017). The economic climate is an essential factor due to the unpredictability of Brexit and the impact of COVID-19. This has led to low confidence among consumers and reduced economic growth (Savills, 2020)
Although there have been many challenges, the London real estate market remains to be an excellent choice for investors and developers globally. The city has a robust economy, skilled workers, and vibrant and excellent culture (RICS, 2017). These attributes draw investors that target long-term real estate properties with good returns and an opportunity for growth and development. As such, the London real estate market is highly likely to continue being a primary focus for investors and developers for a long time (Knight Frank, 2021)
The Prime Office Market
The prime office market in London is one of the most sought-after globally. Many factors affect the prime office market. They include supply and demand, economic conditions, and varying occupier needs. One of the main significant factors is location. St James’s, Mayfair, and Covenant Garden are the most sought-after locations. Canary Wharf and the City of London are also popular areas. The factors driving the demand for office space include amenities, transport, and prestige. However, the pandemic has increased demand in a location with good outdoor areas and space.
Rentals are a significant indicator of the health of the prime office market in London. The values of rentals in the most desirable places can cost up to £ 120 per square foot per Annum. This shows that London is of the most expensive markets globally. Rental values are affected by factors such as the presence of amenities, the location, and the quality of the building. However, the pandemic has reduced rental values in some areas as occupiers seek more flexible lease terms.
Another metric for prime office markets is yield. They are a measure of the return on investment an investor can anticipate receiving. Prime office yields in London range is 3% to 5% based on the quality of the building and location. However, Covid 19 pandemic has led to some unpredictability in the market, with yields anticipated to soften in the short term due to lower rental values.
The pandemic has had an impact on the prime office market in London. Increased remote working has reduced the demand for office space in London. However, this has been balanced out by the increased demand for space in suburban areas with enough space and outdoor areas.
Prime Retail Market
The prime retail market has had several changes in recent years, which can be attributed to a change in consumer behavior due to the growth of online shopping. Location is essential in the prime retail market in London. Regent Street, Oxford Street, and Bond Street are the most desirable places. These areas are popular due to the high tourist presence, football, luxury, and high-end brands. Rental values for prime retail spaces in the areas are about £ 1000 per square foot annually, which can be among the highest in the world (JLL, 2021)
In recent years, there has been a change in demand for prime retail space from traditional department stores to experimental and lifestyle brands. Consumers are keen on finding unique shopping experiences that cannot be recreated online (McKenzi and Atkinson,2020). This has led to the emergence of pop-out stores and temporary retail concepts. Landlords have thus opted to offer flexible lease terms and short lease lengths to help accommodate these types of clients (Hoesli & Malle, 2022, 295-306.).
The prime retail market has also faced increased demand for smaller retail spaces. Retailers mainly focus on having a solid online presence instead of a physical footprint (Hoesli & Malle, 2022, 295-306.).The trend has been pushed by increasing rental values and the need to cut costs, and it has led to a change toward curated retail spaces and multi-brand stores (McKenzi and Atkinson,2020, pp.21-38.).
Another main factor in the prime retail market is the effect of e-commerce on physical retail. Online shopping has reduced sales for traditional retail stores forcing retailers to adapt their business models to include online sales (JLL, 2021). However, physical retail plays a crucial role in ensuring customer engagement and brand awareness. The prime retail market has responded by including digital technology in the physical shopping experience (McKenzi and Atkinson, 2020, pp.21-38.).
Discussion Of The Market and The Potential Opportunities It Offers
London real estate offers many opportunities for investors, including prime offices and retail stores. Despite the economic uncertainties, London continues to be a global financial center and hub for international business, which has helped grow the real estate market. One potential opportunity is the growth of the tech industry in London, which has increased the demand for office space in areas such as Old Street and Shoreditch (Orr et al., 2022). Another potential opportunity is the redevelopment of underutilized properties in prime locations. With limited space in central London, investors may find value in renovating or developing properties to address modern demands. The modern demands include combined retail, office, and residential units (McAllister, 2020, 565-583.). There is also potential for growth in the luxury retail sector, especially in Mayfair and Knightsbridge, which attracts several high-end international shoppers. Luxury brands continue to expand in London, and investors who can seize prime retail space in the areas may benefit from the strong demand for high-end retail experiences (Gillespie, 2020, pp.599-616).
Recommendations
One key main recommendation is the diversification of the Portfolio in London. Instead of investing mainly in one sector, such as retail and office, the investor should consider mixing to decrease risk and increase returns. This can include the combination of retail, office, and mixed-use properties in different areas of London. Another key recommendation is strategic location. The investor needs to consider a location with high demand and potential for growth. This can include areas with upcoming infrastructural projects, such as Croserail, which will increase connectivity and attract businesses and residents. In addition, areas such as Camden and Shoreditch can provide a solid rental demand (Gillespie, 2020, pp.599-616).
In addition, the investor should ensure that they have tenant diversification. The portfolio should not rely on a few key tenants. The investor should ensure they target a diverse range of tenants, such as small and middle-sized enterprises and large corporations, to spread the risk of vacancies and likely defaults (Birimoglu Okuyan and Begen, 2022, pp.173-179.). The investor should also conduct a regular market analysis. Real estate in London is constantly changing; therefore, it is crucial to analyze and adjust the portfolio where necessary regularly. This can include paying attention to vacancy rates, rental rates and demands in different sectors and areas to establish the likely risks and opportunities (Crona, Folke, and Galaz, 2021, pp.618-628.) Lastly, the investor should consider that they adhere to environmental, social, and governance considerations. An investor should ensure that their properties have a low carbon footprint. Their properties should also support social cohesion and sustainable communities. This can help future-proof the portfolio and ensure the properties maintain their values over time (Ionașcu, Mironiuc, M., Anghel & Huian, 2020).
References
Birimoglu Okuyan, C. and Begen, M.A., 2022. Working from home during the COVID‐19 pandemic, its effects on health, and recommendations: The pandemic and beyond. Perspectives in Psychiatric Care, 58(1), pp.173-179.
CBRE. (2021). London Retail MarketView Q1 2021. https://www.cbre.com/insights
Crona, B., Folke, C. and Galaz, V., 2021. The Anthropocene reality of financial risk. One Earth, 4(5), pp.618-628.
Gillespie, T., 2020. The real estate frontier. International Journal of Urban and Regional Research, 44(4), pp.599-616.
HM Revenue & Customs. (2022, January 26). UK property transactions completed in December 2021. Gov.uk https://www.gov.uk/government/statistics/monthly-property-transactions-completed-in-the-uk-with-value-40000-or-above
Hoesli, M. and Malle, R., 2022. Commercial real estate prices and COVID-19. Journal of European Real Estate Research, 15(2), pp.295-306.
Ionașcu, E., Mironiuc, M., Anghel, I., & Huian, M. C. (2020). The involvement of real estate companies in sustainable development—An analysis from the SDGs reporting perspective. Sustainability, 12(3), 798.
JLL. (2020). London Skyline Report 2020 https://www.jll.co.uk/en/trends-and-insights/research/South-East-Office-Market-Report-2020
Knight Frank. (2022). Q3 London office market review Q3 https://www.knightfrank.com.hk/research/central-london-retail-market-dashboard-q3-2022-9544.aspx
Knight Frank. (2022). Q4 London office market review https://www.knightfrank.com/research/report-library/central-london-retail-market-dashboard-q4-2022-9986.aspx
London & Partners. (2022). Why Londonhttps://www.londonandpartners.com/
McAllister, P., 2020. Creating operational alpha? Operating models for real estate management. Property Management, 38(4), pp.565-583.
McKenzie, R. and Atkinson, R., 2020. Anchoring capital in place: The grounded impact of international wealth chains on housing markets in London. Urban Studies, 57(1), pp.21-38.
Orr, A.M., Jackson, C., White, J.T., Lawson, V., Gardner, A., Hickie, J., Richardson, R. and Stewart, J.L., 2022. Retail Change and Transition in UK City Centres. Real Estate, Place Adaptation and Innovation within an integrated Retailing system (REPAIR) End of Project Report.
RICS. (2017). Q3 2017 UK Commercial Property Market Survey. https://www.rics.org/globalassets/rics-website/media/knowledge/research/market-surveys/uk-commercial-property-market-survey-q3-2017.pdf
Saville. (2020). Spotlight: London Offices. https://www.savills.co.uk/research_articles/229130/307052-0/sp-10-2020—spotlight-london-offices—web.pdf
Appendices
List of graphs/tables/figures
Figure 1: Recent office and retail details in London
| Property Type | Location | Property Name | Size (sq ft) | Rent (per sq ft) | Sale Price (per sq ft) | Yield (%) |
| Office | West End | 10 Hammersmith Grove | 103,000 | £75 | £820 | 4.5 |
| Office | Canary Wharf | 25 Churchill Place | 290,000 | £55 | £915 | 4.8 |
| Office | City of London | 1 St. James’s Square | 70,000 | £85 | £1,424 | 4.2 |
| Retail | West End | 61 Oxford Street | 9,000 | £1,200 | £18,000 | 3.8 |
| Retail | Canary Wharf | Crossrail Place | 100,000 | £200 | £1,500 | 5.0 |
| Retail | City of London | 20 Fenchurch Street | 16,000 | £350 | £4,000 |
Figure 2: New Property coming onto the market
| Development Name | Location | Property Type | Completion Year | Total Square Footage |
| 22 Bishopsgate | City of London | Office | 2022 | 1.4 million sq ft |
| 1 Triton Square | Euston | Mixed-use | Completed in 2021 | N/A |
| The Goodsyard | Shoreditch | Mixed-use | Expected completion in 2023 | N/A |
Figure 3: Recent sales
| Property Name | Sale Price | Yield |
| The Leadenhall Building | £1.15 billion | 4.4% |
| The Walbrook Building | £575 million | 4.0% |
| One New Change | £676 million | 4.1% |
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