London Office Market Shows Signs of Recovery

Strategic Insights -

The UK's FTSE 100 property companies, British Land and Landsec, have reported strong results, indicating a turning point in the London office market. The work-from-home trend, which led to a significant decline in office space demand, appears to be losing momentum. More than two-thirds of UK bosses planned to cut office space in 2020, but this number dropped to one in seven this year, according to KPMG.

Key Takeaways:

  • British Land reported its first six-month period of net asset growth since 2018, with the past six months being its busiest period for London office leasing in a decade.
  • Landsec reported a 0.5% growth in office values, sending shares higher.
  • Despite the increase in office leasing, both companies' shares are still trading at a discount to forecast net asset value, with a 25% discount for Landsec and 18% for British Land.
  • The shortage of energy-efficient offices is a complicating factor, with just 36% of British Land's offices meeting the grade, but the company plans to spend £50m to upgrade the rest.
  • A two-tier market is emerging, with prime central London office space vacancy rates at just 3%, significantly lower than the overall figure.
  • London office rent rises are expected to be modest, with prime yields averaging 3.75% for City offices, significantly higher than other European capitals.
  • Law firm Allen & Overy has agreed to move to British Land's Broadgate campus, occupying less space than its current requirements.
  • The number of visitors to workplaces is close to 80% of pre-pandemic levels, indicating a recovery in office usage.

Statistics:

  • 36% of British Land's offices are energy-efficient
  • £50m will be spent to upgrade the remaining 64% of offices to meet energy-efficiency grade
  • Prime yields average 3.75% for City offices in London
  • Prime central London office space vacancy rates are at 3%
  • The number of visitors to workplaces is 80% of pre-pandemic levels
  • Landsec shares are up little more than 10% year-to-date
  • British Land shares are up little more than 10% year-to-date
  • British Land's net asset value is forecast to be £4.69 billion for the year to March 2022 (Source: S&P Capital IQ)

Sources:

  • Google Community Reports
  • S&P Capital IQ
  • CBRE
  • KPMG
  • British Land Company
  • Land Securities Group