London office rents: Naysayers are right to worry about a bubble – but London will keep growing
London’s office market is booming, there’s no doubt about it. We are the midst of an upward cycle and have seen huge levels of capital investment and rental growth in the last few years. This is largely thanks to a spike in demand fuelled by the economic recovery and increased confidence in businesses.
With the level of growth we’ve experienced, some are asking whether we’re witnessing a bubble and if there’s a danger of another 2007 market collapse. Such fears are justified.
Factors such as the slowdown in emerging markets, the possibility of a Brexit and concerns over the level of supply are reason enough for the property market to have concerns. However, development cycles from the last 30 years suggest we are yet to reach the peak of our current cycle; economic growth is on a course for sustainable progress alongside a controlled increase in interest rates and yields are likely only to creep up gradually from the end of 2016.
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The capital’s rising population – expected to be 10 million by 2030 – will no doubt play its part in sustaining a healthy level of development. We’re making vast infrastructure improvements, such as Crossrail 1, Thameslink and Northern Line extensions, which are expected to open up development opportunity into London's emerging neighbourhoods and accelerate the trend of businesses moving beyond traditional locations.
We’ve already seen good growth around the fringes of Central London, partly due to the city’s changing business dynamics. As a result, the last five years have seen an explosion of small and medium-sized firms across the capital and there are now 256,100 more businesses with 0-49 employees than there were in 2010.
A boom in London’s tech industry has contributed to this figure, with the number of tech start-ups showing the steepest increase of any sector in the last year. This spread of activity across the capital is good for the market and hints at more sustainable growth in the future.
There has also been some concern that the slowdown in emerging markets could lead to a reduction in overseas money targeting London. I believe, however, that the capital’s safe haven status will continue to attract overseas investors. Longer-term, the prospects for London are positive.
Forecasts show the London economy will grow more quickly than most other advanced major cities with increasing diversification through the technology and life sciences sectors. As such London will remain the gateway city for the UK for some time to come.
Those who fear we’re in a bubble are right to question how sustainable our current level of growth is. But it’s important to remember that this is 2015 and not 2007, and although we will see some moderation in rents into 2017 and 2018, we will still see their growth in the coming years.