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West End buoys

Gregor Watt reports that London is leading the way with a rental recovery

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As investor sentiment turns positive towards property, so too are the returns produced by the asset class.

According to property analyst Investment Property Databank, February saw the first positive annual growth in commercial property values since 2007.

IPD head of UK client services Malcolm Hunt says: “This is the first positive annual capital growth in exactly two and a half years. The combined influences of yield compression and an improving rental environment have buoyed capital values which, together with robust income returns, have all contributed to the first positive double-digit annual return, at 11.1 per cent, since July 2007.”

Hunt also reports that across the country downward pressure on rents seems to be easing. “Rental pressures, although still negative, has decelerated to its lowest monthly level since August 2008, at -0.1 per cent, driven by a moderately improving economic outlook.”

In one specific market sector, rents already appear to be back in positive territory. The IPD’s figures show that City and West End London office
rents are already back in positive territory, growing by 0.2 per cent and 0.3 per cent respectively in January this year. The Royal Institution of
Chartered Surveyors says January saw the first decline in the amount of office space available for rent in London for two years.

RICS senior economist Oliver Gilmartin said: “Surveyors have turned mildly optimistic on the outlook for rents in London for the first time in over two years outside the retail sector as the capital continues to drive the recovery. The news that lease lengths are no longer declining in the capital and incentives are being scaled back for offices and industrials will come as some comfort for investors whom have driven a sharp rebound in pricing since the autumn.

“To be sustained, the rapid rise in capital values in the London market needs to be supported by further rental increases, particularly as prime
yields are rapidly approaching financing costs.

“The reluctance of banks to lend to developers has clearly added some support to rents in London as available space is no longer rising outside the retail sector. Significantly, development starts continue to fall back.”

Standard Life UK property fund recently completed the purchase of a £19m mixed-use property in the heart of the West End and manager Nigel
Chapman says: “We anticipate strong rental and capital growth in this sector and believe that the specific timing of lease events within the
building should deliver strong performance to the fund.”

Estate agents and property managers Savills also predicts that central and West End London offices could lead the way in the recovery of the
commercial property market.

Savills’ annual look at the state of the central London office market, published in February, also concluded that the vacancy rate for offices in
the capital has peaked and predicts 2010 should see a recovery in the rental market.

Savills says: “2010 will be the year that upward rental growth returns to the central London office market. However, the growth will be patchy and based on supply shortages rather than a dramatic increase in demand.

“We expect that upward rental growth will emerge first in the City office market, primarily on 100,000 sq ft grade A units where a supply and demand imbalance has already begun to emerge. This will wash over into the wider prime market in the City during the second half of 2010.”

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