May 2021

The United Kingdom – and most particularly England’s capital city of London – was severely impacted by the coronavirus pandemic. The healthcare system appeared to be overwhelmed on occasion and Boris Johnson’s government overchallenged and unable to cope. The situation was compounded by concerns about Brexit and the economic consequences for the London’s Square Mile (City) and the entire economy. The tables have meanwhile turned. England and the United Kingdom are right at the forefront of the COVID-19 vaccine and, in tandem the progress of the vaccination rollout, the British economy is recovering more rapidly than expected. Market participants meanwhile predict real GDP growth of 5.4% in 2021, with an uptrend going forward. This all adds up to a regular surge in demand, not least for England’s capital city of London.

London’s office real estate market has suffered last year. Take-up recovered in the first quarter of 2021, having nevertheless reached an all-time low of just under 100,000 sqm in the second half of 2020 (3/4 below the long-term average of around 400,000 sqm). The City, in particular, performed very poorly in 2020. Against the backdrop of the Brexit-induced relocation of jobs in the financial sector to other European locations, exacerbated by the Covid-19 pandemic, this comes as no surprise. The City has so far lost considerably fewer jobs than predicted by many analysts, however. Surveys conducted by Ernst & Young since the Brexit referendum in 2016 show that 7,600 employees in the financial services sector have been relocated (status as of January 2021). Some estimates even assumed as much as 75,000 jobs. This is not the only positive news from London’s office market: Companies from the expanding TMT sector, Google, Netflix, Twitter and TikTok, to name a few, are now the new major tenants and have recently leased new space or are planning to do so in the near future (see Figure 1).

Not only is demand showing signs of recovery, but also supply is developing well for the leasing market. Growth in new space in London’s office real estate market has almost ground to a halt, which is particularly applicable to the City. Of Europe’s capital cities, such as Paris, Amsterdam, Berlin, Madrid etc., Rome is the only one showing evidence of lower growth in new office space in the next few years (see Figure 2).

Consequently, the vacancy rates in London could drop notably in the years ahead, and rents resume their uptrend. This is also borne out by the forecasts of the real estate research service provider PMA.  Accordingly, in a European comparison, London is forecast to see the sharpest growth in office rents: growth of 7.1% for the period from 2021 to 2023.

Sound rental growth in the years ahead is sending the right signal for bringing international investors back to the Thames. Added to this is a yield mark-up of between 50 and 100 basis points for core office properties compared with “peer” capital cities such as Paris, Berlin and Amsterdam. Consequently, London’s taxi drivers can look forward to welcoming back long absent and sorely missed travellers from Asia, North America and Europe in the coming months.