SUN opportunistically acquired Nova Properties and Minster Building in London during the COVID-19 pandemic. London has weathered Brexit, the COVID-19 pandemic and the switch to hybrid working. The recovery in take-up for office space was broad-based but was strongest for the West End at 24% above the 10-year average. SUN’s recovery was driven by office and retail properties in Singapore as London accounted for only 11.5% of portfolio valuation. Maintain HOLD. Target price: S$1.73.

WHAT’S NEW

• Central London office market on the mend. Take-up in Central London totalled 3.8m sf in 2Q22, an increase of 123% yoy and 24% above the 10-year average. It was a strong quarter for pre-letting, which accounted for 10 out of 11 leases of more than 50,000 sf in size. There is flight to quality as occupiers prefer new and high-quality office space.

• Recovery was strongest at the West End. Take-up for office space has rebounded back to pre-COVID-19 levels. The recovery was broad-based but was strongest and fastest for the West End. Take-up for the West End during the past 12 months was 24% higher than the 10-year average. The recovery was driven by the financial services sector, especially in the core markets of Mayfair and St James. According to Cushman & Wakefield, prime office rents have increased by an average of 7.2% over the past 12 months (City Core: +9.3%, West End: +8.8%, East London: unchanged).

• Hybrid working did not reduce demand for office space. CBRE has analysed leasing data for Central London during the past 12 months. Occupiers moving to new office spaces on balance are increasing their space requirements. There are more tenants expanding than tenants contracting. CBRE surveyed 68 tenants who executed new leases. Of these, 39 tenants took up more office space compared to 29 who downsized. The study demonstrated that hybrid working did not reduce demand for office space.

• Differentiating London from continental Europe. The UK government plans to overhaul regulations to reclaim London’s title as the busiest financial centre in the world. It intends to ease regulations for banks, insurers and fund managers to reinvigorate the financial services industry post Brexit. Regulations on a wide range of services from IPOs to green finance must be rewritten to replace existing EU regulations. Potential new regulations include reducing the amount of cash reserves that insurers need to hold and providing flexibility for insurers to invest in infrastructure projects. Regulators will also be made accountable to a secondary objective of promoting economic growth.

Source: UOB Kayhian Research - 7 Sept 2022