In its latest series of property outlook reports for 2011, Henderson Property's specialist research team examines the prospects for the UK commercial property market highlighting how Central London is being targeted as a growth location by investors in contrast with poor prospects across the rest of the country.
Despite the yield-driven recovery in UK capital values drawing to a close, Central London remains appealing because its global exposure provides investors with opportunities to diversify from domestic woes: the sterling exchange rate against a basket of world currencies is still 14% lower than pre-crisis levels. This is leading to higher tourist spending, and the Olympic Games is expected to provide a boost to London's retail and leisure sectors in 2012.
In terms of general economic activity, London's economy will grow by 3.8% per annum, over the next five years compared with 2.5% per annum for the rest of the country.
The report looks specifically at the retail and office sectors.
Henderson expects strong growth in Central London retail rents of 3.5% a year on average over the next five years, compared to 1.8% per annum for the wider UK market. There should be stronger growth in the earlier years, particularly while tourist spending remains strong and with the added boost from the Olympics in 2012.
Looking further ahead, the property research team forecast more retail opportunities for investors higher up the risk curve. These may occur in off-prime pitches in which investors can expect a location discount, but where supply and demand influences are nonetheless compatible with rental uplifts.
Angela Keane, Associate Director of Research, Property at Henderson Global Investors, said: "Retailers know where they want to be and are willing to pay for it. London landlords are reaping the benefits of both buoyant retailer demand and the distinct lack of space capable of meeting retailer requirements. As a result, even off-prime locations within the Central London area are feeling the benefit."
The team believes that despite keen pricing in capital markets the case for investing in Central London offices has not necessarily diminished and remain optimistic that the rental cycle will generate enhanced performance over the next few years.
Andy Schofield, Director of Research, Property at Henderson Global Investors, commented: "Although there are risks that the domestic economy and financial markets will experience greater volatility than usual, London office jobs growth should still improve gradually over the next few years and London should be a key beneficiary of the faster growth in global economic activity.
"London consistently ranks as number one on the Global Financial Centres Index. Overseas share of letting activity has accounted for around half of all City and 30% of West End take-up in recent years. Investors in Central London offices clearly believe in the growth story, in contrast to the bigger regional office markets where over-supply and waning occupier demand appears at odds with pricing".
Source: Henderson Global Investors