London's Commercial Property Industry

London's commercial property industry: key facts and figures

As one of the world's leading business centres, the city of London has one of the largest commercial real estate markets at a global level. In 2011, this market was worth almost £10 billion, and the figures keep growing year after year.

In terms of total volume, the London commercial property market is the world's second largest after New York, as its transaction volumes for 2011 had a total value of approximately £17 billion. Investors show a clear preference for the London market as opposed to the rest of the United Kingdom, particularly when it comes to the occupancy of office and retail space. This has resulted in an increasing gap between the growth rates of the national market and the London market. According to the consultancy firm KPMG, this gap will continue to widen over the coming years.

The office market is the best performing sector in London, as in 2011 offices in Central London yielded returns of 12.7 per cent. Average office rental values have been steadily increasing too, mainly due to the limited supply of prime office space in Central London. As of 2011, the strongest performing market in terms of location was London's West End, followed by Central London.

In terms of lease length, the British Property Federation reports that 76 per cent of the leases signed in 2011 were of less than five years. Small and medium-sized enterprise lease terms are shorter, averaging 4.1 years.

According to data released by market research firm Real Capital Analytics, in 2011 alone various foreign investors (mainly from the United States, the Middle East, Asia, and Europe) infused the London commercial property market with £10.21 billion. This figure represents 77 per cent of the total foreign expenditure in the country, so it is easy to see the importance of the London commercial property industry to the economy of the UK. In 2011, 57 per cent of commercial property transactions in London were carried out in favour of foreign investors.

Commercial property in London: current trends and future forecasts

Since London is a very desirable location for both local and international investors, some experts forecasted that the commercial property market in the British capital would be able to cope with the crisis that has been affecting the property markets worldwide since 2007. These predictions have held true over the past few years, as the London property market seemed relatively unaffected by the declining demand that was so common elsewhere.

However, according to a report that the Lloyds Banking Group published in January 2012, the commercial property industry in the capital seems to be experiencing a downturn in terms of investor confidence. The report shows that in only six months, the confidence index went down from 32.2 per cent to barely 2.8 per cent. It is believed that the main reasons for this declining trend are the deepening Eurozone crisis and limited bank lending caused by tougher regulatory measures.

Although the investors' confidence index seems low, the truth is that the London commercial property market is the only one in the United Kingdom that has recorded positive growth in terms of value over the past year. While the rest of the country has been experiencing negative growth values for more than six months, the London market values have actually increased by 0.4 per cent. Although these are indeed minimal values, they could have a positive effect on investors' confidence if they remain positive for a few months.

Despite the overall negative trend that this year has brought to the commercial property market, it is still believed that some factors could bring an improvement into the London market. One of these factors is the new Crossrail network, which is expected to be up and running by 2018.

Officials at the Department for Transport believe that the improved transport links will result in a surge in the demand for commercial property in the areas of London where Crossrail stations will be located. GVA Commercial Property Management estimates that there could be more than 3 million square metres of additional commercial space being delivered in London once the Crossrail project is complete.

In the meantime, and until that happens, there is another element that might reverse the current downward trend. BNP Paribas Real Estate recently carried out a survey among 100 blue-chip firms in the technology, media, and telecommunications industries. Of those 100 companies, more than 50 claimed that they planned to increase the numbers of staff by more than one third before 2015. This means that an additional 1.2 million square feet of commercial property will be needed in London to accommodate the growth plans of these firms. The areas that would benefit the most were identified as Shoreditch, King's Cross, Southbank, and Stratford.

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