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1、Positioning London for the Future:Quantum vs Quality35 79 1113 15 1719T H E LONDON RE P O R T2K N I G H T FRANK2 0 2 3CONTENTSQuantifying Obsolescence RiskQuality v Quantum Whats Next for Occupier Demand?A Global Education HubRenegotiating Headleases:Navigating a Path to Sustainable OfficesFinding t
2、he Right BalanceCuration Over Cookie-Cutting Re-inventing Londons Retail Floorspace:Part oneCuration Over Cookie-Cutting Re-inventing Londons Retail Floorspace:Battersea Power Station case studyCompeting for Global CapitalBack to Pricing Basics3T H E LONDON RE P O R TK N I G H T FRANK2 0 2 3KNIGHTFR
3、ANK.COM/LONDON-REPORTShabab QadarLondon Research PartnerQUANTIFYING OBSOLESCENCE RISKThe legal requirement to improve EPC ratings raises the obsolescence risk for 7m sq ft of institutional grade leases due to expire by 2027.A structural shift in demand for better quality buildings is unlikely to be
4、filled by the current pipeline under construction,providing development opportunities.Quantifying obsolescence in London office marketsAcross London,approximately 140m sq ft of office space has an EPC rating below grade C,51%of total office floorspace,with the highest proportion in Rest of Docklands
5、(70%),Knightsbridge/Chelsea(68%)and Victoria(67%).In Londons three core CBDs,Canary Wharf ranks favourably with 46%of certified floorspace below grade C,City Core is at 55%and West End Core at 60%.London-wide,this represents 60m sq ft of floorspace space requiring upgrading to improve energy efficie
6、ncy.Impending lease expiries with the greatest obsolescence riskBy 2027,around 7m sq ft of institutional grade leases in London with an EPC rating below grade C,are due to expire.This is the floorspace with the highest re-letting risk,requiring capital expenditure to retrofit or refurbish to be fit
7、for purpose.Breaking this down further,only 5%of those leases expiring with an EPC below C are in buildings of over 75,000 sq ft with almost three quarters in accommodation under 25,000 sq ft.The pipeline is not large enoughHistorically,the development pipeline replenishes ageing stock.The present p
8、ipeline under construction contains 11m sq ft of speculative space due for delivery by 2026.which falls short of average levels of take-up of new and refurbished buildings.We estimate the under-supply at 11m sq ft of the best quality buildings,an approximate shortfall of 7m sq ft in the City,3m sq f
9、t in the West End and 1m sq ft in Docklands and Stratford.Last year,almost 7m sq ft of take-up was for new or refurbished space,representing close to 60%of all lettings.This is 20%above the long-term trend,and includes the highest level for refurbished take-up weve registered since introducing this
10、category in 2004.PART ONESeb JonesGeospacial analystT H E LONDON RE P O R T4K N I G H T FRANK2 0 2 3Amenity provisionWhile improving energy efficiency is a mandatory characteristic of best-in-class buildings,for occupiers,amenity provision and commutability are also key.Weve extended our supply side
11、 analysis to calculate a bespoke amenity provision score for Londons office submarkets,using geospatial techniques to account for proximity of amenities to offices.The London submarkets with the highest amenity provision scores are Covent Garden,Soho,City Core,Fitzrovia and Midtown.Those with the lo
12、west score are Rest of Docklands,Stratford,White City,Vauxhall/Battersea and Knightsbridge/Chelsea.Combining these scores with our projections for locations likely to see a shortfall of best-in-class floorspace is a useful planning tool to inform the decision-making process.AMENITY PROVISION SCORES
13、AND NET PRIME AVAILABILITY Amenity Provision Score Index(LHS)Over/Under-Supply(RHS)m sa ftRest of DocklandsStratfordWhite CityVauxhall/BatterseaKnightsbridge/ChelseaCanary WharfKings Cross/EustonPaddingtonVictoriaAldgate/WhitechapelWest End CoreSouthbank CoreMaryleboneClerkenwell/FarringdonBloomsbur
14、yMidtownFitzroviaCity CoreSohoCovent Garden0.70.60.50.40.20.30.106.05.04.03.02.01.00.0-1.0Source:Knight Frank Research/The Local Data Company/Ordnance Survey/TFL5T H E LONDON RE P O R TK N I G H T FRANK2 0 2 3KNIGHTFRANK.COM/LONDON-REPORTOccupiers will assess the quantum of space they require,some c
15、ontracting,others expanding,but all looking for a step-change in the quality of space to increase utilisation.Market Implications These dynamics have four clear implications for the London market:Purpose the positioning of real estate as a flexible solution to a range of strategic issues.Polarisatio
16、n extending the gap between the best office space and the rest,with opportunities for innovative landlords to reposition well-located and fundamentally sound buildings through retro-refits and refurbishments.Pre-letting an opportunity for landlords with development projects in progress or with plann
17、ing consent.Partnership taking the London market from its traditional adversarial relationships towards a partnership between landlord and tenant,creating a market more responsive to customer need which delivers strong and sustained financial performance.Dealing with functional obsolescencePhysical
18、obsolescence is well understood in the London office market.Far less appreciated is the growing sense of functional obsolescence where corporate occupiers increasingly recognising that their office buildings are no longer fit for purpose in a post-pandemic world.Our(Y)OUR SPACE survey of almost 400
19、global corporate real estate leaders,found that 40%deemed it likely,very likely or definite that they would relocate their HQ facilities over the next three years.Cost sensitivity was a factor with headquarter buildings generally the more expensive offices in the most expensive sub-markets.Yet almos
20、t as significant was the recognition that the new world of work had significant implications for both the quantum and qualities of floor-space that occupiers require.Quality and Quantum Drivers Knight Frank Cresa Global Corporate Real Estate Sentiment Index identified three key dynamics shaping futu
21、re occupier demand for London offices.1.Prospects for global economic growth have diminished over the last year,leading to reduced expectations around revenue,capital expenditure and headcount growth.This sentiment will put a brake on expansionary demand over the first half of 2023.2.Most respondent
22、s remain intent on reconfiguring their office space,adding amenities and services.This will require more than cosmetic meddling.Reconfiguration of office space must be more about driving connection,socialisation and collaboration and have a greater depth and breadth of amenities.3.The baseline for o
23、ccupancy is being reset.An office first stance combined with greater acceptance of flexible working is required.Dr Lee Elliott Head of Global Occupier ResearchPART TWOQUALITY V QUANTUM WHAT S NEXT FOR OCCUPIER DEMAND?Greater functional obsolescence will lead to a resetting of corporate HQs and a dif
24、ferent dynamic in both the quantum and qualities of office space required.2 0 2 3T H E LONDON RE P O R T6K N I G H T FRANK40%deemed it likely,very likely or definite that they would relocate their HQ facilities over the next three years 7T H E LONDON RE P O R TK N I G H T FRANK2 0 2 3PART THREEKNIGH
25、TFRANK.COM/LONDON-REPORTPresence of leading institutionsThe Times Higher Education World University Rankings 2022 shows that for high-ranking universities,London leads the world.It has five in the top 200 and four in the top 100:Imperial College London(12),University College London(18),the London Sc
26、hool of Economics and Political Science(27)Kings College London(35)and Queen Mary University of London(117).Together,Londons 36 universities plus 25 with some capital footprint,occupy almost 400 hectares,a figure reflecting the unwavering demand.UCAS reports London student numbers rose 8%last year,w
27、ith non-EU domiciled students up 17%and UK domiciled students by 11%.Flora HarleyHead of ESG ResearchShabab QadarLondon Research PartnerA GLOBAL EDUCATION HUBLondons educational sector has an unwavering draw for domestic and international students alike.As the sector evolves to meet rising demand fo
28、r educational services so too have space requirements with technology and ESG principles at the core.CityParisBerlinBarcelonaLondonLos AngelesSydneyBeijingHong KongBostonStockholmNumber in THE top 2005435442543Average rank989267759115Sources:Knight Frank Research,Times Higher EducationT H
29、 E LONDON RE P O R T8K N I G H T FRANK2 0 2 3Increasing levels of take-upPost-pandemic,education occupiers have significantly increased their take-up of London floorspace with a 485%increase year-on-year in 2022,the highest level since weve broken down our data by occupier group.This distribution sh
30、ows the sector to be a significant occupier in many London submarkets,notably Aldgate/Whitechapel(c.35%of transactions),Docklands and Stratford(20%)and Strand/Covent Garden(c 15%).Traditional universities have maintained a high number of lettings transactions despite fears that London would lose its
31、 attraction as an education centre post Brexit.However,the largest transactions last year came from non-traditional universities(e.g.BPP)followed by New York University who took 73,000 sq ft at 265 Strand.Space requirements,required in part by new technology,have changed considerably,moving to large
32、r,flexible,open-plan floorspace while recent transactions show a clear drive to best-in-class buildings meeting the highest ESG standards.Accelerating use of technologyThe pandemic,better technology and increasing education costs mean universities worldwide face crucial decisions on EdTech yet the p
33、andemic also showed universities what worked well before Covid-19,including face-to-face learning and campus development.Blended learning has kickstarted discussion on what can be successfully digitised.Universities and investors must work with local stakeholders to deliver the highest quality stude
34、nt experience and win the value-for-money argument.The needs of Generation Z students,their desire for travel and new experiences,must be considered.The pandemic has undoubtedly accelerated many challenges but longer term,student numbers are forecast to rise and the campus will remain at the centre
35、of university life.Universities themselves acknowledge their growing role in the evolution of cities and in the repurposing of place.485%Post-pandemic,education occupiers have significantly increased their take-up of London floorspace with a 485%increase9T H E LONDON RE P O R TK N I G H T FRANK2 0 2
36、 3KNIGHTFRANK.COM/LONDON-REPORTAndrew TylerHead of Central London Office DevelopmentRENEGOTIATING HEADLEASES:NAVIGATING A PATH TO SUSTAINABLE OFFICESA sustainable workplace provides clear benefits for both occupiers and landlords but historic headleases can appear something of a straitjacket.Without
37、 compromise even common goals will be difficult to achieve,risking assets becoming stranded.A headlease is the main lease between a long leaseholder and a freeholder and governs how upgrades to buildings are implemented.Londons Office market,once dominated by freehold-based transactions,now produces
38、 significantly more leasehold-based transactions:43%in 2022 compared with 34%in 2007.Many headleases in Londons commercial buildings are historic agreements that do not adequately reflect the requirements of the modern Office market.The critical importance of ESG today means it is vital that refurbi
39、shment can be carried out on buildings to bring them up to legal standards.The benefits to freeholder and leaseholder include increased revenue and a healthier and sustainable workplace.Yet many headleases predate todays focus on energy efficiency,created with no provision for upgrading and refittin
40、g in line with modern standards.So while a large percentage of London Office stock requires redevelopment,strict rules within many existing headleases prevents this happening.For Landlords this can mean rental income is restricted.At Knight Frank we have extensive experience of successfully renegoti
41、ating the heads of terms in commercial leases,setting clear responsibility for ESG provision.Three key areas to consider are the requirement to allow redevelopment,the need to protect the earning potential and the ability to sell the asset on.PART FOURT H E LONDON RE P O R T1 0K N I G H T FRANK2 0 2
42、 3The ESG credentials of the building directly relate to the rental income received.To protect the income,most landlords prefer their leases to be on a rent receivable basis,the amount of rental potential rather than the amount received.Modern ground leases increasingly incorporate some fixed income
43、 along with an element derived from the rents achieved in the building,encouraging the long leaseholder to periodically refurbish the building as the Landlord is sharing implicitly in the void and re-letting risk.Investors look for assets unfettered by restrictive covenants.Restrictions on who an as
44、set can be sold to,the existence of forfeiture(termination)clauses and any investment sub-lease where the income from the property is divided among multiple sources are all potential sources of tension for investors that many headleases include.In the past five years,our team have successfully reneg
45、otiated headleases based on a thorough understanding of these issues.At the centre of our advice is value creation/retention and a gaze into the future to ensure the headlease will be fit for purpose for the entire term.The concept of mixed-use spaces is nothing newLondon developments have diversifi
46、ed from single use projects as best-in-class regeneration hubs such as Battersea Power Station and Canary Wharf successfully adapt their offering.Earls Court is a prime example where ECDCs new look proposals set to deliver a balanced neighbourhood with a range of living,employment and leisure uses.T
47、ransport and infrastructure remain key:Lendleases proposals at Euston Station can be Londons next CBD,the first single hyper connected estate.South Bank and Canada Water also target a full breadth of residents,occupiers,workers and visitors through new planning permissions focused on mixed-use schem
48、es.However,mixed-use doesnt just mean residential and non-residential.Different risk profiles and delivery strategies around the various living sector uses enable those areas not suitable for business space to provide a breadth of development.What makes mixed use schemes so compelling?Consumer demog
49、raphics are key.People want to live and work in versatile,dynamic multiple-use locations,reducing the built environments contribution to carbon emissions and enhancing wellbeing through social connectivity.Occupier demand for these developments has driven compelling,sustained rental growth and creat
50、ed a ripple effect for nearby buildings.The flexibility of mixed-use schemes,and how it allows the de-risking of expected returns,is an important consideration:Delivery strategy Delivering the full spectrum of cradle to grave living sector uses over higher risk residential and office uses and reduci
51、ng delivery of commercial sectors with product at a range of pricing points.Funding Reduced risk and greater visibility over future cashflows for developers and finance providers.Timing Delivering the right product type at the right point in the cycle to diversify market timing risk across a range o
52、f real estate uses.Mixed-use schemes are generally more viable,or perhaps less risky,particularly for residential schemes.Developer returns vary significantly depending on the exit route as highlighted in the table below.A guaranteed exit such as Affordable Housing attracts a much lower Profit-on-Co
53、st than those with full market exposure.With lower risk funding opportunities,the living sectors can deliver a broader spectrum of early wins compared with selling off-plan in international markets.Its increasingly obvious that building mixed-use is vital in creating a modern city.It makes better us
54、e of limited land and evidence demonstrates that connecting people with goods,services,community and infrastructure has a positive impact on capital values while generating long-term social and community value.1 1T H E LONDON RE P O R TK N I G H T FRANK2 0 2 3FINDING THE RIGHT BALANCE With a demand-
55、supply imbalance affecting both residential and prime commercial markets,opportunities exist to accelerate the delivery of new product and meet expected demand across both sectors by creating mixed-use,mixed-income,walkable places that both satisfy residents needs and allow access to the deepest poo
56、l of talent.Oliver Knight Partner,Head of Residential Development ResearchNick Parr Partner,City&East Land AgencyPART FIVEKNIGHTFRANK.COM/LONDON-REPORTT H E LONDON RE P O R T1 2K N I G H T FRANK2 0 2 3HIGH LEVEL ESTIMATES OF PROFIT ON COST MARGINSource:Knight Frank Research17.5%20%10%12%5%8%17.5%20%
57、12.5%17.5%12.5%17.5%RESIDENTIAL SALEBUILD-TO-RENTAFFORDABLE HOUSINGSENIORS HOUSINGSTUDENT HOUSINGOFFICES(BUSINESS SPACE)Assuming appropriate development opportunity in London with planningTransport and infrastructure remain key:Lendleases proposals at Euston Station can be Londons next CBD,the first
58、 single hyper connected estate.A limited development pipelineBuild it and they will come and Clone Town Britain are mantras that defined the retail development agenda throughout the 1990s and 2000s but are now,hopefully,consigned to history.For retail development,read retail over-development.Too muc
59、h retail floorspace was developed without any clear identity and today,theres a clear over-supply of underwhelming retail space.Given this situation and retails relative fall from grace in the real estate hierarchy,the retail development pipeline both in London and UK-wide is understandably constrai
60、ned.Why build more if theres already too much?Yet while the pipeline has slowed,several retail schemes remain in the offing,particularly in London,all very different from what went before.Out with the oldThe established shopping centre model no longer applies.Bigger is not always better,excess space
61、 will probably be vacant longer term and department stores are not necessarily the reliable anchor they once were.Yet while the list of credible department store operators has diminished(c.f.Debenhams and House of Fraser),those still active are far more selective over the space they take.Without the
62、 assurance of a major anchor store,MSUs and other tenants may require additional persuasion and be more wary of paying top-dollar rents in a vain chase for space.Generous incentives such as long rent-free periods,pin money and fit-out contributions may no 1 3T H E LONDON RE P O R TK N I G H T FRANK2
63、 0 2 3Stephen Springham Partner,Head of Retail ResearchEmma Barnstable Senior Research AnalystKNIGHTFRANK.COM/LONDON-REPORTCURATION OVER COOKIE-CUTTING RE-INVENTING LONDONS RETAIL FLOORSPACERelevance the generic override to any successful retail location.The watchword for the pipeline retail develop
64、ments across the capital.PART SIXT H E LONDON RE P O R T1 4K N I G H T FRANK2 0 2 3longer cut the mustard either.Instead,retailers are more risk-averse and affordability is paramount.Rather than long leases with upward only reviews,retailers are more likely to push for shorter terms and de-risked de
65、als,such as turnover rents.Additionally,the potential occupier base is now less standardised.Many usual suspect tenants have gone and the potential new breed is far more diversified a positive for space curation,but often a negative for covenant strength.The old model is dead and as new ones start t
66、o emerge,are they models or bespoke solutions?in with the newOne thing is certain:the cookie-cutter approach no longer applies.Successful retail development has no one size fits all blueprint.What can we learn by reviewing recent and forthcoming London retail developments?Our first case study consid
67、ers Battersea Power Station.COMPARING THE TWO RETAIL DEVELOPMENT MODELSNew ModelSize appropriateAlternative anchors e.g.,foodstores,MSU clusteringMore flexible termsShort leasesAffordable rentsTurnover-dealsBalance between retail,leisure and other usesMix of multiples and independentsCustomer-centri
68、cOld ModelBigger is betterDepartment store anchorHeavy incentivesLong leasesAggressive rentsUpward-only reviewsRetail-dominatedNational multiplesLandlord-drivenA fresh perspectiveAfter a famously protracted gestation period,Battersea Power Station(BPS)presents an innovative approach to retail develo
69、pment,showcasing an ambitious new retail recipe.The masterplan approved by Battersea Power Station Development Company(BPSDC)is an arts and culture led redevelopment aimed at City Sophisticates who comprise 63%of its shopper catchment.By paying equal attention to the hard aspects of physical place d
70、esign and softer aspects of location offering and identity,developers hope to influence our experience of place.The key elements are:Blended neighbourhood and destination shoppingBattersea aims to create all-day appeal for residents,tourists,and workers,mixing the practical and the pleasurable.Local
71、 neighbourhood convenience units sit alongside destination retail and leisure.High street brands breaking from the identikitBPS avoids any high street homogenisation.Well-known brands create comfort and familiarity yet their design and stock ensures differentiation,de-branding to appear less commerc
72、ial.Nikes store,for instance,hosts a member-only Live concept,tailored to the south London market.1 5KNIGHTFRANK.COM/LONDON-REPORTCURATION OVER COOKIE-CUTTING RE-INVENTING LONDONS RETAIL FLOORSPACECase Study 1 Battersea Power StationPART SEVENThe Battersea shop will be pride of place,a wonderful,soc
73、iable third space.Part installation,part gallery,part museum but full of inspiration you can take home.THE BATTERSEA POWER STATION DEVELOPMENT COMPANYT H E LONDON RE P O R TK N I G H T FRANK2 0 2 3Emma Barnstable Senior Research AnalystT H E LONDON RE P O R T1 6K N I G H T FRANK2 0 2 3Complementing
74、the familiar with the new and unusualLesser-known international brands are interspersed amongst high-street retailers to keep shoppers curious.Examples include innovative and sustainable childrenswear brand Petit Pli and Amsterdam optician Ace&Tate.Diverse unit shapes and sizesThe scheme provides a
75、variety of spaces to surprise visitors from flagship spaces to intimate kiosks.Using retail theatre to tap into the experience economyIn a convenient but clinical world of on-line purchasing,consumers want meaningful and memorable experiences.Stimulating retail theatre adds spectacle and drama.Fitne
76、ss brand Sweaty Bettys first concept store(The Powerhouse)takes design inspiration from BPSs industrial heritage,raising customers energy levels with positivity playlists.New rhythms of retailingA dedicated events programme attracts visitors back year-round,building shopper loyalty with visitors enc
77、ouraged to return for unique experiences such as the Winter Lights Festival.New anchor tenantsBPS has no department store but several enticing flagship tenants.Batterseas Electric Boulevard includes Artotel,a 164-bed hotel and Zaras new showcase store.Shop&learnEducation is central to the Battersea
78、experience.Exhibitions,displays and the Lift 109 chimney elevator experience,showcase BPSs cultural history and reinforce its unique brand identity:part installation,part gallery,part museum but full of inspiration you can take home.1 7T H E LONDON RE P O R TK N I G H T FRANK2 0 2 3KNIGHTFRANK.COM/L
79、ONDON-REPORTthe current five year average.Private investors allocated an average 27%of their wealth to commercial real estate with almost 25%of them intending to increase investment in the sector.Actual investment transactions projected to rise modestly in 2023The results of our latest Active Capita
80、l Report revealed the office sector as the most active globally.Countries such as the UK with greater levels of liquidity and inflation hedging potential are the main beneficiaries of cross border real estate investment.The results of our forecasting model,using our proprietary deals data to forecas
81、t actual transaction volumes,show an expectation of global investment volumes falling by 17%to 9.5bn.This is slightly below trend levels of London office transactions-9.8bn-and follows two years where transaction values grew by nearly 50%.Top investor groups geographically are the APAC region with 4
82、bn of transactions(42%),Europe with 2.3bn(25%)and North American with 1.7bn(18%).Historically,private investors accounted for an average 20%of London transactions.We expect this to be 25%this year,potentially investing 2.4bn.Reduction in weight of money targeting London officesThe competition for gl
83、obal capital should intensify in 2023,with less liquid markets and challenging underwriting transactions.The results of our 2023 Global Capital Tracker Survey of real estate investors confirm expectations that the weight of capital targeting London offices will fall 5.5bn to 43.8bn.Asia Pacific and
84、Greater China remain the largest investor groups with capital intended for London of 9.7bn and 9.6bn respectively.European investors account for almost 7.2bn(16.5%share),North Americans for 5bn(11.3%share)and United Kingdom for 4.6bn(10.5%share).However the weight of money chasing London offices is
85、almost seven times the levels of available institutional grade stock.Risk aversion can provide opportunityPeriods of risk aversion result in lower transaction levels from investor groups unable to access efficiently priced credit yet also in a rise in transactions from private investors,particularly
86、 for higher lot sizes.During the GFC and Eurozone debt crisis,private investors increased their share of transactions volumes to 30%,compared to a 20%average in the previous five years with similar trends in the early 90s,after the Brexit referendum and during the pandemic.The role of private capita
87、l in commercial real estate is growing.Our 2022 Wealth Report highlighted that private capital investment grew globally by 52%during the pandemic to$405bn,38%above PART EIGHTShabab Qadar London Research PartnerCOMPETING FOR GLOBAL CAPITALThe investment landscape changed considerably in 2022,precipit
88、ating a marked slowdown in London office transactions.The weight of money targeting London offices should fall in 2023,with forecast transaction volumes of 9.5bn.1 8T H E LONDON RE P O R TK N I G H T FRANK2 0 2 34.02bn2.39bn0.89bn0.44bn1.67bn0.09bn APAC EUROPEGREATER CHINAMIDDLE EASTNORTH AMERICARES
89、T OF WORLDLONDONINBOUND INVESTMENT TO THE LONDON OFFICE MARKET 2023Source:Knight Frank Research1 9T H E LONDON RE P O R TK N I G H T FRANK2 0 2 3KNIGHTFRANK.COM/LONDON-REPORTDisconnect with the leasing marketRecent re-pricing is largely thanks to the credit markets changing conditions.Debt costs now
90、 exceed property yields placing greater emphasis on the prospects for rental growth to drive performance.Unlike previous cycles,theres no significant overhang of empty prime buildings.Instead,speculative completions are in-line with long-term trend levels,while prime building take-up is almost 60%of
91、 all lettings.We expect this constrained pipeline to keep occupier demand resilient for best-in-class buildings.Yield spreads to widenHigher market risk means different buildings will be subject to greater levels of due diligence and pricing.Recent data shows the spread between prime and secondary q
92、uality buildings has narrowed considerably:1.6%in the City Core and 2%in the West End Core.During previous high-inflation periods,that spread reached 3.5%and 4.5%respectively.We expect greater levels of obsolescence risk with secondary quality buildings to lead to a return of much wider spreads to b
93、est quality buildings.Pricing the fundamentalsInstitutional investors are attracted to innovation driven economies and sustainable investments but in uncertain times,they seek a premium reflecting the higher risk of investing in commercial real estate.By deconstructing current prime yields using the
94、 fundamental investment pricing equation,weve calculated the implied risk premium in Londons three main business districts:Yield+Expected Net Rental Income Growth=Risk-Free Rate of Return+Risk PremiumUsing a long-run risk premium of 2%,our deconstruction analysis suggests investors expect annual ren
95、tal growth of 0.3%in the City Core,-0.5%in Canary Wharf and 1.25%in West End Core.However,we believe the prospect for net rental income growth,especially for prime buildings,is stronger.Independent forecasts for 10-year government bond yields(risk free rate)suggest interest rates will fall to 2.25%b
96、y the end of 2026.Weve used an average of 3%.Our latest forecasts for prime rents show annual average growth of 2.5%in the City Core,2.1%in Canary Wharf and 2.4%in West End Core.While obsolescence risk in prime buildings is low to negligible,weve adjusted our rental growth figures by a prudent annua
97、l average of 1%for depreciation.Breaking pricing fundamentals into component parts shows the implied risk premium is highest in Canary Wharf at 3.60%,with 3.25%in the City Core and 2.15%in the West End Core.Our estimates of the implied risk premium are higher in all three office submarkets,suggestin
98、g that current pricing incorporates an additional return to investors.However,periods of above average risk premia have been in parallel with expectations for negative rental growth.PART NINEShabab QadarLondon Research PartnerBACK TO PRICING BASICSAs interest rates have risen,so too has investors ri
99、sk aversion.We believe current pricing reflects an above average risk premium compared with the long-run average while higher obsolescence risk and weaker rental growth prospects in average quality buildings will see a return of wider yield spreads to prime.T H E LONDON RE P O R TK N I G H T FRANK2
100、0 2 3SubmarketPrime yieldRisk free(10 year Govt bond yield)Net prime rental growth(depreciation adjustedImplied risk premiumTABLE 1 IMPLIED RISK PREMIA ABOVE LONG-RUN AVERAGE OF 2%City CoreCanary WharfWest End Core4.75%5.50%3.75%3.00%3.00%3.00%1.50%1.10%1.40%3.25%3.60%2.15%Source:Knight Frank Resear
101、ch2 0Knight Frank Research provides strategic advice,consultancy services and forecasting to a wide range of clients worldwide including developers,investors,funding organisations,corporate institutions and the public sector.All our clients recognise the need for expert independent advice customised
102、 to their specific needs.Important Notice:Knight Frank LLP 2022 This report is published for general information only and not to be relied upon in any way.Although high standards have been used in the preparation of the information,analysis,views and projections presented in this report,no responsib
103、ility or liability whatsoever can be accepted by Knight Frank LLP for any loss or damage resultant from any use of,reliance on or reference to the contents of this document.As a general report,this material does not necessarily represent the view of Knight Frank LLP in relation to particular propert
104、ies or projects.Reproduction of this report in whole or in part is not allowed without prior written approval of Knight Frank LLP to the form and content within which it appears.Knight Frank LLP is a limited liability partnership registered in England with registered number OC305934.Our registered o
105、ffice is 55 Baker Street,London,W1U 8AN,where you may look at a list of members names.KNIGHTFRANK.COM/LONDON-REPORTDiscover our expert insight on the Intelligence labHEAD OF LONDON OFFICESPhilip H+44 20 7861 1192CHAIRMAN LONDON OFFICESAngus G+44 20 7861 5150LONDON LEASINGDan G+44 20 7861 1314Ian McC
106、+44 20 7861 1506Abby B+44 20 7861 1306LONDON LEASE ADVISORYSimon A+44 20 7861 1341LONDON DEVELOPMENTAndrew T+44 20 7861 1319LONDON CAPITAL MARKETSJamie P+44 20 3909 6814Nick B+44 20 7861 1309Anthony B+44 20 7861 1216Oliver S+44 20 3830 8638LONDON TENANT REPRESENTATIONRichard P+44 20 7861 5159FLEXIBLE OFFICE SOLUTIONSAmanda L+44 20 3826 0661LONDON VALUATIONSSimon G+44 20 7861 1292LONDON RESEARCHShabab O+44 20 7861 1234ESG CONSULTINGJonathan H+44 20 7861 1181CONTACTS