UK offices set to outperform as rents edge up

UK Offices are set to outperform this year, driven by accelerating rental growth, according to leading property manager F&C. However, secondary stock across the board could be vulnerable as the market adjusts.

"The office market, particularly in Central London, remains in favour with a wide range of property investors" , said Paul Herrington, Managing Director of the F&C Property Asset Management.

"Positive factors include a recovery in tenant demand, very low levels of immediate new supply and a significant uplift in rents. Developers are reviving schemes, especially in the City. As for offices in the rest of the UK, the slow recovery in the South East continues with tenant demand re-appearing and falling yields. Some larger provincial towns are seeing headline rents rise as top quality new stock is completed while well-let buildings in second tier towns also offer value."

Herrington explained that having returned 18.1% in 2006, the property market's pace had slackened in the last six months but annualised returns currently remained in the double digits. Nevertheless, Herrington said that there was limited scope for further yield compression and returns were expected to move to more sustainable levels, with single digit returns forecast for the coming years.

"The past year has seen strong competition for properties and high prices being paid. As the market adjusts, however, some property, especially secondary stock, may be re-rated."

Herrington said that over £55bn had been invested into property last year and the market remained strong.

"High demand from both institutional and retail investors continues to drive the market. Property is becoming increasingly accepted as a major alternative asset class, which will support the investment demand further, albeit at more modest levels" , he concluded.