Commercial property developers in London could earn more from land appreciation than from renting office space – as land values across the capital begin to increase.
According to a report on Bloomberg, Great Portland Estates saw the value of their 1.3 acre plot in Mayfair increase by 10% between April – June 2012. This increase is reportedly nearly double the return that a successfully let office development would generate in the whole year.
But what is causing this upswing in land values? Well experts believe that it stems from a lack of lending to construction companies and a lack of new developments – making those sites suitable or ready to develop increasingly attractive.
This same balance of demand and supply is credited with driving up the cost of securing office space in the capital also – with rents in the West End of London recently being reported as the second highest in the world after Hong Kong.
While commentators are highlighting Central London as an attractive investment centre, the capital required to play at this table is “pretty much limited to those with large equity checks, sovereign wealth positions or very strong balance sheets who can bring on board corporate debt” according to the development and investment arm of Brookfield Office Properties Inc.
Given the cost of developing new office space in the Capital, it is clear to see that those behind the schemes will need to charge high rents in order to deliver a return – potentially restricting the types of businesses able to enter the market.
With this in mind it is perhaps no surprise that Serviced Office Space is continuing its surge in popularity – as businesses look to secure the office space they need on the kind of flexible terms that traditional long term, capital heavy leases are unable to provide.