Offices may be out of favour given the work-from-home revolution, a relatively high vacancy rate and a weak macro outlook, but there are still opportunities in London real estate, say analysts at JP Morgan.
“While the near-term outlook for real estate remains uncertain, we look ahead several years, and assess the potential opportunity in London offices,” the analysts wrote in a note to clients.
“We argue a more constructive view can be taken over the medium term after assessing, among other variables, 243mln sq ft of London office space, 42mln sq ft of potential development and lease expiry events to 2027.”
Considering these variables, the analysts wrote that the growth in London office stock has been slowing for some time.
Of the 154 potential developments totalling 42mln sq ft, 36mln sq ft could be completed by 2030, although only a third is under construction and only a third is still available to let.
“As seen with two blockbuster leases by GPE at 2 Aldermanbury Square and Derwent London at 25 Baker Street, neither of which complete until 2025, tenant demand is focusing on the best quality space, of which a shortfall is emerging,” the analysts wrote.
They added that demand for the best, and green assets, was set to be exacerbated by changing regulations, as seen by the vacancy and rental differential for Building Research Establishment Environmental Assessment Method (BREEAM) “excellent” and “very good” labelled buildings compared to the overall sample.
“A third of the current under-construction development pipeline is targeting an ‘Outstanding’ BREEAM label versus 3% of our sample,” they wrote.
Ranking the real estate companies in their coverage based on preferred exposure, JP Morgan said Great Portland Estates (LSE:GPOR) and Derwent London PLC (AIM:DLN) tied for the number one spot.
Contact the author at emily.jarvie@proactiveinvestors.com
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