Development viability hinges on stronger rental growth in the UK

In the current environment of high construction and debt costs, new office development in the City of London looks difficult without strong market rental growth. We estimate that developers would need nearly 6% per annum rental growth for underwriting to stack-up. This looks ambitious given the headwinds facing the sector from greater hybrid working, even with strong demand for modern, flexible and energy efficient space.

What you will learn:

• The market will eventually adjust to a point where development looks more financially viable, but greater near term cyclical headwinds with recession risks increasing, suggests prime rents are more likely to fall than increase over the next 12-18 months.
• Residential development viability also looks stretched as it requires roughly double the pace of rental growth going forwards relative to the last 3 years.
• High street retail development in London is the final sector where rents need to grow at a faster pace than seen over recent years, to make development attractive.