The pace of rental growth in London increased from 7.8 percent in 2014 to 8.5 percent last year, according to the London Markets Analysis report by research firm MSCI and London property consultant Levy Real Estate.
The strongest rental growth was delivered by Camden/King’s Cross, where the King’s Cross Central development helped drive average rental growth of 17 percent. Mayfair, which saw a continued conversion of office property to residential – limiting the supply of new space – saw rental growth of 11.9 percent last year.
“The latest research shows a market which still has significant momentum,” according to Simon Heilpern, an investment partner at Levy Real Estate. Returns are now increasingly being driven by a growth in rents and this suggests that London’s commercial property investment sector can expect further sustainable growth in values.”
Average total returns from investments in London were 18.1 percent in 2015, with Camden/King’s Cross again leading the pack with a total return of 27.3 percent. The Eastern Fringe delivered a 24.7 percent return and Marylebone & Euston 23.1 percent.
Mayfair retained its position as the submarket with the most keenly valued property, with average equivalent yield at 3.7 percent. The biggest inward yield shift in 2015 was the Western Fringe areas of Clerkenwell, Smithfield and Farringdon, where average equivalent yields moved in 80 basis points to 5.2 percent.
“Pricing in the London market…strengthened further during the course of 2015, but the rate of yield compression has slowed as key market locations begin to reach record yield levels which question price fundamentals,” said Colm Lauder, vice president at MSCI.
He added: “This has resulted in rental growth taking over as the main performance driver, as confident, and expansionary, businesses compete for space.”
The London Markets Analysis report into the capital’s commercial property sector tracks the comparative performance of more than 1,000 assets and looks at the fundamental drivers of the market including what is contributing to returns, rental growth and yield shift.