There are two scenarios concerning the supply side in London City. The first, espoused by JP Morgan, is highlighted in Daniel Thomas’ Property Column in the Financial Times of 14th September. It suggests that, following the supply-driven prime rental growth already witnessed this year, and the lack of new build options completing after 2012, developers will be dusting down plans, commencing schemes this year and early 2011 and delivering into 2013 and 2014. History has shown that the City property market can be driven by behavioural factors as well as economic – and if too many start schemes this year the supply response will be sufficient to take the steam out of rental growth at a time of a stronger economy. This, however, does not mean rents will fall.
But there is a second scenario. Despite the noise in the property press about imminent starts in the City very few, if any, developers have actually put spades into the ground. Speculative development finance remains unavailable from the banks and injections of funding from institutions and overseas investors have been slower to materialise than first expected. It takes three years to build a building, from decision through to practical completion. The longer the market leaves it to start, the less likely we are to see a meaningful supply response within the next 3-4 years. There is a very real possibility of a strengthening economy coinciding with a drastically – property market. London has retained its competitive edge as one of the world’s leading financial and business centres following the financial crisis, but the availability of modern high spec accommodation for occupiers, along with of course decisions on tax and regulation, could affect this leading position.
True, there is significant potential for new build within the City – and in surrounding regeneration areas. But potential does not mean probable and the longer the market waits (whether voluntarily or not) the more likely scenario two becomes.