Two months ago, we presented our Prime office rental growth forecasts for London’s City and West End offices. Now that we have understood the full impact of the coronavirus, we have re-assessed the Prime office market in both areas. London is an important city for investors around the world, including China. Although we follow market confidence, sentiment and surveys, we provide our own strong forecasts as support. The coronavirus has brought about a complete change in how people in organisations work since working from home became mandatory at the end of March. Our results show that our growth forecasts for 2020 will fall by 13.8% for London West End we forecast an 8.4% fall for London City. Below in figures 1 and 2, we graphically illustrate our rental growth forecasts showing the historic rental growth rates in blue and brown showing our revised rental growth rates.
On June 12th 2020, the UK announced that GDP output fell by 20.4% in April and in addition to the fall of 5.8% the previous month, this represents a significant contraction. This has induced pressure on jobs, with many major businesses announcing job cuts, and small businesses struggling to survive. The UK economy is reliant upon small business, and although the government has worked to support these businesses in the short term during the pandemic, it will not be enough in the long term. That said, this particular economic shock is expected to be a short one, but with many people losing their jobs and travel to London from abroad remaining restricted, the rental growth forecast for both areas for 2020 show a significant decline.
We expect a correction in 2021 in both areas, however, the strong decline in 2020 brings the 5 year average forecasts considerably lower (rental growth rates in London West End at 0.5% growth and London City at 0.3%). However, if we disregard the growth high negative growth rates for 2020, London West End’s growth rate is 4% between 2021 and London City is 1.7% for the same period. Cap Rates (yields) remain largely similar to our previous forecasts, and we do not expect much movement through to the end of the year. That said, as long as we do not experience a second wave of the coronavirus pandemic later in the year or early next year, it is hoped that a quick recovery will ensue with London’s prime rental growth market returning to positive figures.
A new working directive?
The last few months have seen a new and enforced behavioural pattern in working directives where people, equipped with the latest communication technology with their work colleagues, work from home and disregard the often lengthy commute into an office space. Is this the shape of things to come? On average, an individual residing outside the central London area could save 3 hours whilst working from home, whilst also saving in travel costs, eating out and of course, they can also enjoy an often more relaxed working environment at home. If this is the case, and with companies under pressure to cut costs, demand for office space will be muted. Companies will still need a premises as a place of business for essential face to face client contact, however, the ordinary worker may not be required to visit the business premises daily – they may only be required to travel into the office for essential meetings and not much more.
That said, London investors have spent vast amounts of investment money upgrading offices spaces to represent a more work-friendly environment, with many adopting games rooms, break out areas with fitted kitchens and televisions around the offices for workers to relax. The workplace has become a much friendlier place than 20 years ago, and some businesses may be looking for personal contact from their work colleagues. We await the outcome and sentiment from tenants and landlords alike once the government restrictions regarding personal contact and people movement has passed. For now, the demand for rental space for the rest of the year will be significantly reduced.
London Rental Growth during the last economic shock
The purpose of this section is to highlight how the previous economic shock and how London recovered quickly. Figures 3 and 4 show London West End and London City during and after the financial crisis.
The graphs for London West End and London City show similarities. The red line in the above graphs show the recovery stage after the financial crisis. This resembles a striking similarity with our forecasts following the coronavirus pandemic and the graphs show that recoveries happen quickly and are fairly pronounced. London West End recovered after the financial crisis mainly due to the fact that many firms embraced new technology which led to surges in demand for offices. The financial centre (London City) is a hub of international activity, and the financial crisis, although showed negative growth rates during the crisis emerged with positive figures thereafter once trading and confidence returned.
The coronavirus pandemic is a one-off event, as with the financial crisis but the pandemic may return. If attitudes towards office dwelling is sustained, meaning that businesses and individuals do not change their attitude to the way they work, then we should see returns to normal levels of growth. If working habits change, then this could impact demand, but much of this will be realised in the coming months.