Predicting what the coming year may hold for London’s real estate market is difficult, particularly given the recent introduction of tier-four restrictions, but the capital’s property advisers and agents are trying hard to find cause for cheer.

Many see pent-up demand for office space in the capital after the pandemic caused most occupiers to pause their plans.

“Positively we have begun to see the larger occupiers begin searching for space again,” says Nick Raven, principal at consultancy Hanover Green, adding that tenants will want to see “what they perceive as good deals in order to transact”.

“At present there is a disparity between occupiers seeking a cut-price deal and landlords seeking to protect values,” Raven says. “We have seen greater letting flexibility and larger incentives granted to transact and this will continue in 2021.”

Even so, Raven expects a slow start to 2021 as occupiers wait for clarity over ongoing restrictions, vaccination programmes and the possible impact of a no-deal Brexit, as well as the eventual end of government support.

London versus the rest

At CBRE, London managing director Richard Smart anticipates a return to more normal levels of business activity in the second half of 2021 and that rental recovery will happen more quickly for new, high-quality space.

He adds that the lack of demand in 2020 was “principally caused by deals being deferred rather than cancelled”.

Smart and colleagues at CBRE also expect investment volumes to be higher next year than the £9bn total the agency is forecasting for 2020.

Knight Frank, like Cushman & Wakefield, is predicting investment turnover to be lower, at £8bn for 2020. James McCluskey, partner at Knight Frank, believes 2021 will see “continued strong demand” for London’s office properties, particularly those that are core or value-add keeping pricing firm.

“London still offers relative value when set against the major European cities and we expect further inflows from investors taking advantage of the yield arbitrage,” he adds.

Stephen Down, executive director and head of central London investment at Savills, says: “Prices are still holding firm for core assets and we expect a flight to quality when coronavirus restrictions allow travel as London continues to look good-value in a historical context and international context.”

Dry powder

For Oliver Fursdon, head of central London commercial development at Savills, the office will be “arguably more important to businesses than before” following the debate in 2020 about how and where we work.

“Locations in established hubs will remain most occupiers’ and investors’ sector of choice,” he says. “High-quality, well-located buildings with good amenity and which tick both ESG and wellness boxes will outperform. With continued strong central London office-based employment over the next 10 years, the case for spec development will remain clear.”

This could include the redevelopment of the capital’s hotels into offices, according to Simon Price, partner in the real estate group at law firm Mayer Brown International.

“In the hospitality market, the longer it takes for hotels and other leisure businesses to get back to a reasonable level of income, the more likely it is that the current accord between hotel owners and lenders will become strained and that may lead to forced sales of hotels at much reduced pricing,” he says.

“For well-funded investors – including the PE funds with significant dry powder – 2021 could be the buying opportunity of a lifetime for London hotels, whether to keep them as hotels, assuming an increase in occupancy levels in late 2021, or to repurpose the buildings for offices, residential or different hospitality uses, such as longer-stay apart-hotels.”

Price adds: “Demand for prime offices from conservative long-term investors – particularly from Asia – is still very strong and the pricing for well-let offices seems stable.”

Andy Bruce, partner and global head of real estate at Linklaters, considers the outbreak of Covid-19 to have “accelerated a move away from ‘big business’ meaning big ‘buildings’”.

“This presents a potential problem for a commercial and financial hub like the City of London and the real estate investment market in particular,” Bruce adds. “Core City assets have been perceived as a safe bet for decades. Is this about to change?”

He adds that to continue to be successful the City will need to attract “new occupiers and visitors whose working habits and want of experiences are perhaps entirely unlike those which have gone before”.