Central London Office Space Returns Continue to Grow

Returns on Central London office space and retail continue to grow with occupier confidence, according to a report from property investor Cluttons' Commercial Property Market Outlook (CPMO) report.

The rate of total returns are set to reach double figures in 2013 - between 14-16 per cent for office assets in the City and West End markets. This is the highest growth rate in 16 months, according to the report.

Central London retail spaces have also experienced a resurgence in demand, with returns up to the highest level for almost three years.

International investors currently account for 70% of the London-based office investments, and continue to dominate the market. This has proved a blessing for office providers outside of the capital, with UK SMEs refocusing on spaces in other areas across the country. Bidding wars in the capital have benefited assets with secure, long dated income nationwide.

Occupier sentiment is driving increasing rental value growth, particularly within in Central London office market, according to the CPMO.

The wider UK regions continue to experience constrained rental value growth, offices remain the strongest-performing commercial sector. Increased demand and robust performance in London and the south east have underpinned this.

"The market is clearly benefiting from increased confidence, indicated by the diversification of international investors who continue to dominate the market. Increased competition and limited supply continues to drive an upturn in capital values within Central London, with trophy assets often transacting well ahead of asking price as a result," said Sue Foxely, head of research at Cluttons.

"There are opportunities outside the capital, however. Investors have recognised that London's market is highly competitive and that they must broaden their horizons as yields harden. There is sustained interest in well-located, high quality assets, particularly in key locations within the M25. The south eastern office market is anticipated to produce total returns of around 12% this year, the highest levels recorded in nearly three years," she explained.