London’s struggling office market is in a “rental recession” as the amount of vacant space in the West End, City, and Canary Wharf business districts of the UK capital has reached a 30-year high. This has put pressure on the shares of several prominent landlords.
In a report downgrading Land Securities, British Land, Derwent London, and Great Portland Estates, Jefferies anticipated a 20% decrease in London office usage due to post-pandemic hybrid working and tenants’ increased preference for greener buildings in the suburbs.
The first victim of technology was retail, and offices are likely to follow. As renters sell off extra space, utilization has decreased, and landlords’ pricing power is eroding, according to the analysts.
Early Wednesday trade saw a decline in shares of the four developers, with Great Portland Estates down 3%, Land Securities down 1%, British Land down 2%, and Derwent London down 1%. The larger FTSE 350 index was essentially unchanged.
Property companies throughout the world are dealing with two problems at once: declining office occupancy and substantially rising funding costs caused by increasing interest rates.
German and Swedish real estate companies have faced difficulties, and shares of the biggest landlords in the UK have fallen this year to levels not dissimilar to those seen following the turbulent mini-budget that was passed in that nation last autumn.
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The West End of London has a vacancy rate of 7%, while rates in the City and Canary Wharf are 10% and more than 20%, respectively. Historically, 8% marks the beginning of a rental recession when rents begin to decline.
The rents collected by warehouse owner Segro at logistics park Park Royal, which were over 30 pounds ($36), were likely now higher than the market rate at Canary Wharf, which is home to important financial tenants like Barclays, JPMorgan, and Morgan Stanley.
Long-term HSBC, a company based in Canary Wharf, recently stated it would move to a significantly smaller location in the city.
Separately, Land Securities, which on Wednesday will host a capital markets event for investors, stated that demand for its central London office portfolio remained “strong,” with occupancy rising to 96.9% over the first five months of the fiscal year.
In a series of “very timely” disposals, the company recently sold off 2.2 billion pounds of mostly aged offices that were leased to single tenants. Chief Executive Mark Allan called the sales
“We have been steadfast in positioning the business for a higher and longer interest rate environment over the past year,” Allan added.
According to the most recent Fund Flow Index from Calastone, investors have been steadily losing faith in the larger UK real estate market, with withdrawals from property funds accelerating noticeably in August.
As of this point in the year, investors have sold 428 million pounds worth of interest in property funds, according to Calastone data.
Due to rent uncertainty and declining developer earnings, Jefferies stated that the investment market was becoming less liquid.
Real estate investment trusts (REITs) in London “appear cheap but are probably not a good value.”
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