Should commercial landlords be investing in London’s ‘donut’?

Commercial property giants CBRE (Coldwell Banker Richard Ellis) recently reported that a dwindling supply of Central London office space is causing a rent hike on the city's outskirts. As zone one prices soar, companies are being forced to leave existing commercial hotspots in search of affordable locations.

Is 'donut' property worth it?

Rental values in the outer London/M25 office sector, otherwise known as the 'donut', jumped by one percent last month. This rise marks the fastest rental increase in the area since January 2000, and it isn't hard to see what's behind the spike – prices at the Shard recently reached £90 per square foot, reflecting a general rise in many London rents this year.

Although some experts are warning that London's 'bubble' may burst, other investment firms remain convinced that prices will continue to soar. Should the trend persist and its ripple effect on small firms continue, investment property in the 'donut' will become ever more attractive to commercial landlords.

A sour aftertaste?

While 'donut' property may turn out to be lucrative, there are several potential pitfalls to consider. Occupier take-up in London's outer ring will probably fall sharply if the city's property market does crash, which could in turn lead to new owners paying expensive holding costs.

It's also important to consider how growth in the 'donut' will progress. Though it is true that outer ring rents are increasing, commercial property in this area is still expensive relative to other parts of the UK, and it's unclear how high future values will be. In the worst case scenario, investors could find themselves paying large sums for commercial properties that remain attractive only to small struggling firms. Given that SMEs typically have lower buying power, landlords may never see anything like the astronomical rents that are par for the course in zone one.

Commercial landlords must have secure cash flows to make sound investments. Without the ability to forecast, it is impossible to weigh up the possible risk of adding properties to an existing portfolio. If you're a property owner who is considering a purchase in the 'donut', contact Dukes Bailiffs and we'll help you eliminate rent arrears that could get in the way of a great opportunity.