London property: out of office

The fabled optimism of the property industry is being sorely tested. Mid-pandemic, the prospects for Central London offices seem as desolate as its empty streets. News that big law firms have slashed floor space requirements is the latest sign that homeworking is more than a temporary measure. Standard Chartered plans to offer flexible work options — including providing “near-home” workspaces — to more than 90 per cent of its employees by 2023.

Remote working will have an above-average impact on demand for London offices. That is partly because working in London involves longer commutes than other UK cities. It is also because of the preponderance of service industry jobs relatively well-suited to homeworking. Consultants McKinsey has calculated that the UK labour force could work remotely one-third of the time without a loss of productivity — a higher proportion than elsewhere. 

That, combined with Brexit and wider economic disruption, should take a toll on commercial property. Central London office rents will fall 7 per cent to 8 per cent this year, with vacancy rates reaching 10 per cent in the first half, Colliers estimates. Traditional office providers will face competition from flexible work spaces, which account for a higher proportion of London’s office space than other European centres. Short-term leases probably will grow in popularity, providing opportunities for flexible office providers, including brands such as British Land’s Storey and Landsec’s Myo.

Yet grounds remain for optimism about the future of offices. Even if workers spend a couple of days at home, employers may still want enough space to occasionally bring all employees to the office.

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For now, the sector still appeals to global investors. That was demonstrated last month when British Land sold more than £400m worth of offices in London’s West End to German insurer Allianz. With gilt yields at rock bottom, prime London office yields of between 3.5 per cent and 4.25 per cent look attractive — assuming Zoom does not present the same existential threat to offices as Amazon does to shops. That looks a reasonable bet, even if some big law firms choosing to rein back on space gives optimists pause.

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