London offices in demand as musical chairs gets serious
Making sense of the latest trends in property and economics from around the globe
5 minutes to read
The ornate, Baroque Revival façade of 25 Finsbury Circus overlooks the largest open space in the City of London. And while the Grade II listed exterior has remained little changed for more than a century, the inside will soon include all of the bells and whistles that modern corporates want: flexible layouts, a rooftop terrace, excellent amenities, wellness areas and a reassuringly long list of sustainability certifications.
Buildings like these are increasingly rare, which is why they're being snapped up by corporates that can't settle for anything less. In March, international law firm Simmons & Simmons announced that it would relocate from CityPoint to 25 Finsbury Circus in 2030, once the property has been comprehensively refurbished. The move "is a strong statement of our ambitions," said Simmons & Simmons managing partner Jeremy Hoyland. It was also the largest deal signed in the City of London during the first quarter, according to Knight Frank's London Office Market Report.
This stratosphere of the capital's office occupier market is beginning to look like a stressful game of musical chairs. Our report shows there are now 33 active requirements for spaces exceeding 100,000 square feet (sq ft) but only 22 buildings available. Once they're gone, they're gone – at least for a while. London's development pipeline has now peaked at 16.3m sq ft, with 11m sq ft under speculative construction, but the volume of new starts is tapering off due to rising costs and funding constraints. Our analysis projects an undersupply of 7.6m sq ft by 2028 (see chart).
The pursuit of stability
That said, occupiers face an uncertain economic outlook and costs are mounting. Our report notes that some are recalibrating their strategies, with certain firms pivoting to shorter term leases as others double down on securing future proofed space.
Nevertheless, the looming supply crunch is fuelling rental growth; in the City Core, rents climbed from £95.00 to £100.00 per sq ft over the quarter, marking a robust 5.3% increase. The West End Core also maintained its premium, with rents advancing from £160.00 to £167.50 per sq ft, a 4.7% rise. Southbank, long considered a value alternative, posted a notable gain as well, with rents rising from £82.50 per sq ft to £90.00 per sq ft. Looking ahead, the convergence of scarce new supply and strong structural demand, particularly as lease expiries loom, will keep the pressure on. Our forecasts suggest City Core rents will grow by an average of 5.8% annually over the next five years, with the West End Core following closely at 5.2% growth per annum.
There is some irony in the fact that the economic turmoil caused by Brexit has actually further entrenched London's status as a safe haven for international capital. That experience underscored that while shocks can shake confidence, they can't dislodge London’s primacy as a financial and commercial powerhouse.
Granted, these numbers pre-date Donald Trump's implementation and subsequent unwinding of severe tariffs, but the uplift in investment activity stands as a testament to London's status as a magnet for investment. At £2.5bn, volumes were the highest since 2023, marking a 29.5% quarterly rise. Sovereign wealth funds were the most active, accounting for 53.9% of capital deployed. There was a clear increase in appetite for core assets, reflecting investors’ pursuit of stability amid global uncertainty. Core deals surged by 236.4% over the quarter, while value add opportunities also saw robust interest due to persistent supply demand imbalances.
Broadly stabilised
We're seeing similar themes in the regional office occupier market, according to Knight Frank's UK Cities Report. Take-up fell 14% in the first quarter, but volumes of 1.4m sq ft still reflect a 27% increase compared to a year earlier and were 8% above the long-run average. Indeed, this was the strongest Q1 in three years.
Larger footprints underpinned take-up: three deals were larger than 100,000 sq ft, the highest quarterly total since Q4 2020. Meanwhile, leasing of new and grade A space accounted for 52% of the total, leaving the vacancy rate for the best space at just 3%. Of the 2.6m sq ft of new and refurbished space in the construction pipeline, a third is already pre-let.
Investors are wary of risk, given the outlook, and investment volumes totalled £151.8 million, a 71% decline on the previous quarter and 38% below the long-run average. Still, pricing at the top end of the market has broadly stabilised. Prime yields of 6.50% represent a 25bps compression compared to the same period a year earlier - that's 175bps above the pre-pandemic level.
Svuota Londra
Italy's plan to lure wealthy foreigners from London has become known in private wealth circles as “svuota Londra” or "empty London", Bloomberg reported this week. A string of recent high-profile departures have made it pretty clear that the UK's clumsy removal of the non-dom regime will come at a cost, and some kind of replacement will be necessary.
Earlier this month, Knight Frank's Tom Bill wondered whether a system with a more palatable name - say, a ‘UK investor visa’ - might work. And now, here we are:
"The UK is drawing up plans for a special visa for foreigners who invest significant sums in Britain," Bloomberg reported yesterday. "Ministers are considering proposals for an investor visa open to people willing to fund sectors seen as strategically important by Starmer’s administration, such as artificial intelligence, clean energy and life sciences."
Investment in property is likely to be excluded, the report suggests.
In other news...
New 100% mortgage deal launches in UK (Times).