There are some observers who are pointing to higher deliveries in the medium term, but we are not so sure. In fact, our sense is that we are heading into a phase of chronic undersupply across Central London’s core markets.

Persistently higher yields and elevated delivery costs continue to render many schemes unviable which, combined with a challenging funding environment, means that development starts are lower. Where viability is challenged, change of use also remains an option, even within traditional core markets including the City, which in turn compounds the tightening of supply.

Some developers will tell you they will complete in a certain year, and some might even press on with the first stage of their construction (demolition, piling and back up to grade for example) but will they or rather can they actually go through with the whole project?

So, the question remains: How much stock will actually get delivered?

We have always analysed the pipeline carefully but today we are placing increased emphasis on real prospect for delivery. Our London development, leasing and research teams work together to classify realistic delivery timetables, taking into account planning status, project readiness and (crucially today) funding. This forms the basis of our pipeline assumptions where, to be clear, we are stripping out the less certain projects.

It’s a moving picture, but our current analysis is that total completions in the central London market may end up in the region of 4.2 million sq ft for 2026 and 2.75 million sq ft in 2027. Respectively, these figures lie 20% and 47% below long-term average completions and, most importantly, are less than half of long-term average Grade A take up for central London at circa 9 million sq ft. These are remarkable figures, and that is before we account for the fact that 43% of the pipeline to 2027 has already been pre-let.

We know that tenant demand is overwhelmingly focussed on prime: the highest quality buildings with great amenity and sustainability credentials in the best locations. 89% of take up in the City of London in the first half of this year was for Grade A space.

With take up running at nearly double this level of deliveries, upward pressure on rents is inevitable.

Savills prime City of London rental forecasts at the half year point are now at 5.1% for 2024, 4.5% in 2025, 4.3% in 2026 and 3.4% for 2027 from last year’s level of circa £91 per sq ft, which means breaking £100 per sq ft as an average prime rent by 2026 and reaching £111 per sq ft by 2028. Our hunch is that we will get to those levels a lot sooner.

For those looking at the viability of existing projects, this will be welcome. Costs are not falling, although they are not rising as fast anymore, and whilst lower yields are a hope, they are by no means a certainty (and certainly not anywhere near their recent historical levels). Rents still have to rise markedly for many schemes to return to viability.

The extent to which this feeds through to land value, and a positive impact on the spread between vendor and purchaser expectations, is a related but separate issue. For mainstream opportunities, our inclination is that the market will need to see momentum around tightening interest rates and yield compression, in addition to rental growth, before we see an upward trend in values and a meaningful narrowing of the gap.

In the meantime, therefore, for developers and funders who follow this logic and are able to get going on schemes to deliver in two or three years’ time, their confidence will be rewarded by strong tenant demand, high rents and sector beating returns.

As always in times of uncertainty, fortune favours the brave.

Further information

Contact James Goldsmith or Oliver Fursdon

Why the world of office investment pricing has changed