How bad is the move to hybrid working for owners of London offices? We see opportunities.

Emma Mogford

Fund manager, Premier Miton Monthly Income, Income and Optimum Income funds

Emma Mogford, manager of the Premier Miton Monthly Income, Income and Optimum Income funds, shares her outlook for the London office property market and explains why she recently added a London-focused commercial real estate company to the portfolios.

How bad is the move to hybrid working for owners of London offices? We see opportunities.

Expectations for capital value growth of London offices fell after the Brexit vote and just as they were starting to recover they were hit with Covid-19 related work-from-home (WFH). Recently, shares in Derwent London, a leading office real estate company traded at a 30% discount to its net tangible asset value, the sum of the estimated valuation of underlying properties. This tells us the market has a pretty negative outlook on the future value of those properties.

At the height of lockdown, some commentators speculated that with employees moving to hybrid working post pandemic, that an average 2-3 days working from home could lead to a halving of required office space!

However, as we start to adjust to a new normal way of working, the reality is much less severe. Below I lay out the reasons why required space will only fall a small amount in my opinion, but how we use the space is changing and that is more likely to determine the winner and losers in the next 5 years.

How much space do we need?

First it’s important to note that we never used 100% of leased space prior to the pandemic. CBRE estimate “occupancy of 70% was typical, including sick days, vacations, business travel, and remote work arrangements”.

Secondly as we return to the office, management must plan space for the busiest days i.e. you need to plan desk allocation for mid-week, not Fridays. In a recent study by Remit Consulting, they found average occupancy for West End offices had reached 37.6%, jumping up to 49.1% on a Tuesday.

While management might like to maximise use of space through ‘hot desking’, or as it is now called ‘activity based working’, this doesn’t suit all employees and the potential loss of talent may not be worth the saving. Savills anticipate there will be an 11% lower demand for office space in 2026 due to hybrid working and desk-sharing.

Current availability

Available space in Central London Office remains elevated with a vacancy rate of 9.0%. It will take some time for this to return back to normal levels but the signs are positive. In the first three months of the year the take up of new space was back in line with the long term average.

Interestingly “under offer” is actually above trend which CBRE attribute to “flight to quality as large occupiers continue to commit to under construction or proposed space”.

The uncertain outlook has held back some developments which has led to a much lower level of new properties currently scheduled to open in 2024 and 2025. A lack of new supply could help bring available space down and push rents higher.

How is the space we need changing?

Employers are increasingly looking for property which can reinforce a return to the office, enhance workforce wellbeing and conforms with ESG strategies. This has lifted demand for high quality, energy-efficient and environmentally friendly Grade A office space.

There is increasing demand for new sorts of space in the office such as collaboration spaces and video call rooms. There is also an increasing focus on employee wellness with the installation of amenities such as showers and bike parking. BT’s new London office attempts to blend work and leisure with on-site yoga sessions, choir classes and a continental buffet bar.

Outlook

So while demand for office space may fall, we believe it won’t be as bad as some fear. We think the bifurcation in demand for quality office space will be significant. By looking at the outlook post 2025, we find ourselves having a differentiated view of the investment opportunities in London office space.

At the end of May 2022, the Premier Miton UK income strategies* bought a new position in Derwent London. Derwent is a high quality property company focussed on London office space with a strong track record of delivering value from their development pipeline. As testament to the company’s long term resilience, the company has increased its dividend every year since 2007.

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Risks

The value of investments may fluctuate which will cause fund prices to fall as well as rise and investors may not get back the original amount invested.

Reference to any particular stock or investment does not constitute a recommendation to buy or sell the stock / investment.

Property values can rise and fall sharply depending on the strength of a country’s economy.

Future forecasts are not reliable indicators of future returns.

IMPORTANT INFORMATION:

For Investment Professionals only. No other persons should rely on any information contained in this document.

Whilst every effort has been made to ensure the accuracy of the information contained within this document, we regret that we cannot accept responsibility for any omissions or errors. The information given and opinions expressed are subject to change and should not be interpreted as investment advice. Reference to any particular stock or investment does not constitute a recommendation to buy or sell the stock / investment.

All data is sourced to Premier Miton unless otherwise stated. Persons who do not have professional experience in matters relating to investments should not rely on the content of this document.

*Premier Miton Monthly Income, Premier Miton Income, Premier Miton Optimum Income funds.

For your protection, calls may be monitored and recorded for training and quality assurance purposes.

Issued by Premier Miton Investors. Premier Portfolio Managers Limited is registered in England no. 01235867. Premier Fund Managers Limited is registered in England no. 02274227. Both companies are authorised and regulated by the Financial Conduct Authority and are members of the ‘Premier Miton Investors’ marketing group and subsidiaries of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

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This section of the website and the content it contains is for retail clients only and by persons who are resident in the United Kingdom [who are not US persons]. Professional advisers should refer to the Professional Advisers site.

The content of the pages of this website is for your general information only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell or purchase shares in the funds or portfolios or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

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Disclaimer

This section of the website and the content it contains is for professional financial advisers only and should not be relied upon, or circulated to, retail clients. Retail clients should refer to the Private Investor's site.

The content of the pages of this website is for your general information and use only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

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