Real Estate

British Land: two-tier London office market shows signs of recovery

The work-from-home movement is losing some of its revolutionary zeal. More than two-thirds of UK bosses planned to cut their office space in the summer of 2020. This dropped to one in seven this year, according to KPMG. That is good news for London office landlords. A strong set of results from British Land on Wednesday suggests the market has reached a turning point.

The FTSE 100 company, which delivered its first six-month period of net asset growth since 2018, said the past six months had been its busiest period for London office leasing in a decade. Landsec, which also reported this week, said its office values had grown 0.5 per cent.

The optimistic tone sent shares higher. But after moving sideways for much of the year, both are up little more than a tenth, year-to-date. They still trade at a big discount to forecast net asset value for the year to March 2022 — 25 per cent for Landsec and 18 per cent for British Land.

Line chart illustrating how workplace visits are down by a fifth by showing a rolling 7-day average of number of visitors to workplaces from November 2020 to November 2021

That reflects exposure to retail, along with uncertainties about the long-term impact of remote working. Many businesses want to be able to accommodate their workers on peak days, generally in the middle of the week. But not all. Law firm Allen & Overy has just agreed to move to British Land’s Broadgate campus. Though it may expand its requirements before it moves, it has signed up for little more than half the space it currently occupies.

Line chart showing a rebased % change of quoted landlord share prices for British Land Company and Land Securities Group from November 2020 to November 2021 plus a second line chart showing West End and City vacancy rates for London as a percentage from 1985 to the third quarter of 2021

The shortage of energy-efficient offices is another complicating factor. Just 36 per cent of British Land’s make the grade, though it will spend £50m getting the rest up to scratch.

A two-tier market is emerging. The vacancy rate for prime central London office space is just 3 per cent, a third of the overall figure. London office rent rises are probably modest. But even that should encourage real estate investors. Prime yields — averaging 3.75 per cent for City offices — are significantly higher than other European capitals. The worst appears to be over for London’s largest landlords.


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