Summary of the market environment
Central London’s commercial property markets continued on their recovery path during the year. Occupational demand increased markedly compared to last year, illustrated by an improvement in leasing activity and, in the investment markets, a diverse group of investors maintained strong demand for well let, centrally located properties.
Supportive investment and occupational markets have sustained capital value growth and pushed rents higher. Looking forward we expect this positive environment to endure throughout 2011 and we have positioned the business to take advantage of these trends.
Main drivers of our markets in the year
The main influences on rental values for our properties are the depth of tenant demand arising from economic conditions and the availability of competing space which provides alternatives for business occupiers. Consistent UK GDP growth has proven elusive as positive figures for the first three quarters of 2010 were followed by a contraction in the period to December. GDP growth moved back into positive territory for the quarter to 31 March 2011 at 0.5% and employment and investment surveys are anticipating growth for the calendar year as a whole. London’s recovery from the lows of 2008 has been sharper than the rest of the UK and the Capital’s employment levels have risen steadily over the last 12 months – this is positive for occupational demand.
The supply of high quality, well located office and retail space is subdued by historic standards as a consequence of reduced numbers of refurbishment projects. Property developers have been constrained due to the uncertain economic environment and scarcity of bank financing. Due to the lengthy gestation period of new schemes, we expect low availability of good quality commercial space to continue for at least the next two years assisting the growth trends in market rental values.
Commercial property values in central London have enjoyed an upward movement during the year as a result of inward capital flows, in part due to the significant appeal of well located buildings as a tangible store of value in a volatile world. The investor demand for high specification, well located properties comfortably outstrips the amount of assets available for sale. Although not perfectly correlated, property values are commonly benchmarked against other investable assets and trends over the last 12 months have been supportive. The main equity and bond markets indices are up since the start of the financial year although the Eurozone Sovereign debt crisis has been a continuous source of downward pressure. Commercial property prices have also been sustained by low benchmark fixed income rates. If this favourable yield spread over bond and swap rates continues, it is likely to underpin property values although we believe consistent rental value growth is essential for capital value enhancement.