Derwent London has said the fundamentals of the London office market continue to strengthen despite a “volatile” economic backdrop.
London’s office market has been in recovery since the end of last year, with falling interest rates and a return to the office helping to support occupancy.
“Demand [is] well above the long-term average and [there’s] a significant supply shortage at the top end… Central London office rents are growing and values continue to recover,” Derwent said.
Prime rents have risen 10 per cent in the last year as top firms compete for best-in-class space amid a flight to quality in the market.
Supply of the “right space” is constrained, Derwent added, with businesses focused on “high quality, well-designed buildings with best-in-class amenity and sustainability credentials”.
This has partly been fuelled by changing energy requirements; tighter rules on energy efficiency have forced firms to upgrade their spaces to comply with the green regulations.
While overall vacancy in Derwent’s buildings is 7.8 per cent, top quality Grade A vacancy rates remain low in both the West End – at 1.4 per cent – and the City – at two per cent.
Rental income at Derwent ticks up
In the year to date, Derwent has completed £13.8m of leasing, renewals and regears (renegotiations of lease agreements).
The company reported an underlying capital growth rate of 1.2 per cent.
Its total property return in the first half of the year was 3.1 per cent, outperforming the MSCI Central London Office Index rate of 1.9 per cent.
Derwent has estimated rental yield growth of three per cent to six per cent for the full year.
Paul Williams, Chief Executive of Derwent London, said: “Looking forward, our total accounting return outlook is the strongest it has been for several years.”
“Through ongoing strategic asset recycling, we are optimising our portfolio to deliver sustained long-term value. Our balance sheet is well-positioned… Proceeds will be reinvested into developments where we expect attractive returns on investment.
“We recently started on site at our next West End project, Holden House, and plan to commence 50 Baker Street, where we have agreement for a new headlease, and Greencoat & Gordon House in early 2026.”