London office rents surge as development economics realign

Refurbishing London’s dated office buildings presents a significant opportunity for those with the capital and expertise to execute. Upgrading ageing stock could create £11.4bn in annual rental income and £262bn of investment value, according to Knight Frank figures.

The opportunity has attracted the attention of the world’s largest private equity firms, which have been active in recent years, Bloomberg reports. The piece quotes Christophe Kuhbier, managing director at Henderson Park, who says that landlords seeking to “sell out of obsolete buildings” are creating opportunities for PE firms, adding that London is a “particularly attractive place” for the strategy, in large part due to its “favourable” outlook for rental growth.

Indeed, prime headline rents in the City Core have surged from £72.50 per sq ft in 2019 to £102.50 per sq ft in 2025 (+41.4%). In the West End Core, they have grown from £115.00 per sq ft to £185.00 per sq ft (+60.9%). Our definition of prime was recalibrated in 2024 to reflect the shift in occupier requirements for premium-spec office space.

Capital hurdles

Historically, rental growth of this magnitude would have triggered a surge in speculative development. However, in this cycle, development completions have been more modest – at an annual average of 2.4m sq ft across the capital – broadly in line with historic averages.

Carbon priorities and cost realities have pushed investors to favour refurbishments, and more than half of future supply is now refurbishment-led. The degree to which the economics tilt back in favour of development will be crucial for occupiers hoping to secure high-quality space in the next five years, and more broadly for London’s competitiveness.

The outlook is improving as rental growth accelerates while cost inflation remains contained. Knight Frank’s London Series team ran the numbers earlier this month. Their model of economic rents assumed delivery of a 100,000 sq ft office in the City Core and 50,000 sq ft in the West End Core in 2029, with compounding construction costs at 2.9% per annum. The team also factored in professional fees, contingency, developer overheads, profits and financing costs – the paper includes the full methodology.

Under these assumptions, the required headline rent to clear the cost of capital hurdle is estimated at £91.50 per sq ft in the City Core and £138.00 per sq ft in the West End Core.

These figures are benchmarked against current and forecast market rents: £102.50 today, rising to £129.75 by 2030 in the City Core, and £185.00 rising to £227.50 per sq ft in the West End Core, illustrating the improving economics. In both cases, current rents comfortably exceed the required level, widening viability margins as rental growth outpaces cost inflation.

The next cycle will favour those who start early. See the paper for more on why.

Up for review

No single dataset captures the full impact of successive UK governments’ approaches to taxing wealthy individuals and entrepreneurs, but a steady flow of evidence since late last year is beginning to paint a clearer picture.

Earlier this month, we revealed that sales of homes worth at least US$10m in London slid in the final quarter to just 35, dropping the UK capital into seventh place in our global tables – behind Sydney, Miami and Singapore.

New analysis of Companies House records by wealth manager Rathbones, covered by the FT, shows that nearly 6,000 owners of high-growth businesses left the UK over the past two years. The greatest proportion were from the technology sector. Similarly, the UK saw a net outflow of 16,500 millionaires last year, while the UAE and the US saw corresponding inflows.

These are beginning to look like very high costs for very little gain. The issue is not just that the UK is becoming uncompetitive, but that its tax system feels like it’s permanently up for review. The first issue needs addressing, though it is admittedly harder. Solving the second should be easier. On that front, there are encouraging signs – an unnamed minister told yesterday’s FT to prepare for a “very, very boring Spring Statement”. Small mercies.

Stamp duty

Hong Kong will raise rates of stamp duty on residential sales valued above HK$100 million (about £9.5 million) from 4.25% to 6.5%, the government announced overnight. The hike, which comes into force tomorrow, is likely to affect about 0.3% of transactions and will raise an extra HK$1 billion.

The move will sap a little momentum from the recovery underway, but buyers are generally less price-sensitive at this level. Hong Kong registered 81 sales above US$10m in the final quarter, moving it into second place in our global rankings. Those transactions were valued at US$1.57bn, extending the financial hub’s two-quarter revival (+45% QoQ by count; +51% by value).

That capped a solid year. There were 4,296 super-prime sales in Hong Kong last year, down from 4,814 the year before but well above the 2,915 transactions recorded in 2023.

In other news...

More homes become cheaper to buy than rent as interest rates fall (Times), Data centres seek credit ratings to unlock billions in funding for AI push (FT), and finally, UK housing provider Unite expects fall in postgraduate students to sap revenues (Reuters).