Strong demand for London real estate even in choppy economic waters

The London real estate market had to navigate choppy waters in 2022: the threat of recession, economic friction caused by Brexit, high inflation and increasing interest rates - so you might think that sentiment would be subdued.

But you would be wrong, as we told 500 of the capital’s leading property players at our annual London Breakfast at the Nobu Hotel in Marylebone this week.

In fact, further expansion is planned for London’s commercial boundaries, with further expansion of campus developments at Battersea Power Station and White City, as well as new mixed use master planned town centres at Canada Water and Brent Cross.

The Canada Water development, by FTSE-100 giant British Land and fund manager AustralianSuper, will cover 53 acres and include workspace for 20,000 people and up to 3,500 net zero homes.

You may find the continued strength of demand for new office space in London surprising, with the adoption of a more hybrid approach to working post pandemic.

But while companies went through two years of learning how to work and manage their workforce remotely, the lessons are now being better understood about the benefits of the office for productivity, learning and culture.

As a consequence, office occupancy is steadily rising with tube journeys increasing every week. The challenge remains how to curate the office and amenity offerings for staff to increase journeys to work on Mondays and Fridays.

As a consequence, demand for prime office space continues to be strong, particularly from the traditional sectors of legal in the City of London core and boutique financial organisations in the West End.

In fact, London office leasing in 2022 was 34% higher at 11.5 million square feet than the year before.

With Tech companies no longer growing, other organisations are taking up the slack. Growth sectors such as life sciences and education are having an increasing impact on the market.

These companies require new offices for different reason: In the wake of COVID-19, healthcare and life sciences organisations have grown rapidly because there has been a re-rating of their global importance.

London is home to over 2,000 research institutions, with more than £2bn of committed biotech funding from multiple major global funding bodies heading their way.

Supported by 18 universities, uniquely London doesn’t have just one or two innovation hubs like most cities, but multiple hubs evolving increasingly diverse yet distinct ecosystems.

But these companies aren’t just leasing any office space.

Companies leasing new offices in London are looking more closely for strong sustainability credentials – repurposed buildings, good energy efficiency monitored by smart technology and for their developers to have strong links with local communities.

The best new buildings also radically re-think the way people work. People have needed to be enticed back to the office by an enhanced experience.

So, more breakout space, better curated amenities and outside space to breathe. Strong transport links are at a huge premium now, with office developments across London on The Elizabeth Line setting new prime headline rents for the submarket.  Expect more of the same this year.

This high demand for offices is translating to strong global investor interest in these properties. Knight Frank reveals today that London offices are expected to attract £9.5 billion, with Asia-Pacific investors alone likely to buy £4 billion of offices.

The re-opening of China will lead to a surge in interest from the Far East, with North American investors encouraged by the strong dollar and weak pound likely to spend £1.7 billion.

Also in the vanguard are cash-rich private investors – like ultra high net worth families – who do not need to borrow to buy London real estate.

Three years on from the start of the pandemic the workplace has undoubtedly changed: old, inefficient buildings which are energy inefficient are no longer attractive to occupiers or buyers.

London’s new generation of super-sustainable, smart workplaces remain in demand, which is continuing to deliver the potential for prime rental growth and attracting billions of global capital to London real estate assets.

Phil Hobley, Head of London Offices, Knight Frank