Given that real estate values are inversely correlated to interest rates, it is no surprise that the sector was among the poorest performers following the outbreak of war in Iran. March 2026 ranks among the worst single month performances by real estate equities in recent times – sitting alongside March 2020 (Covid) and September 2008 (Lehman bankruptcy).
The unresolved situation in the Middle East continues to weigh on sentiment – with expectations moving from several interest rate cuts this year to one quarter-point rise. For London offices, this adds to a long bear-case list that includes the potential for AI to substantially reduce employee headcount (and therefore office space requirements), construction cost inflation, and the speed of depreciation (compared to other sectors).
As such, Derwent London (DLN – the largest UK-listed pureplay London office developer at a £2bn market cap), the £1.3bn Great Portland Estates (GPE) and the small cap player Helical (HLCL) are all trading around 40%-45% below NAV. For a contrarian investor, this may well get the juices flowing especially given the strength of the bull case.
London office fundamentals
Demand – the barometer of the health of the London office market – is running at a record level, totalling 14.6m sq ft, according to Savills data. This is 57% higher than the 10-year average and follows the 2.2m sq ft of leasing activity that was recorded in the first quarter of 2026 (which was 6% higher than in the same period in 2025).
Some bellwether deals to have been struck so far this year include Herbert Smith Freehills Kramer’s 268,000 sq ft letting in the City, BP’s pre-let on the South Bank, Databrick taking around 135,000 sq ft in the West End, and Microsoft taking an Art Deco building in Soho to house its UK AI teams.
In fact, an array of AI businesses are scouring the capital for HQ space. OpenAI and Anthropic have both recently signed up to office space at Regent’s Place, with a host of others said to also be looking to secure office hubs. Microsoft is also said to be looking for a 300,000 sq ft headquarters along the Elizabeth Line to consolidate its wider London workforce.
This sustained leasing activity, which is pronounced at the premium end of the market (where the listed landlords operate) but falls away at the lower end of the market, is having a positive impact on rents. Savills data shows that the average prime rent for the City rose 24% in the first quarter and 40% year-on-year to £130/sq ft, with a new record rent achieved for the City at £160/sq ft. In the West End, the average prime rent held steady at £165/sq ft.
Knight Frank estimates that prime rents in the City have risen 46% since 2020, while rental growth in the West End is up 68% in that time – all during a period when investors were concerned about the impacts of working from home.
A key driver of these rental uplifts is the dearth of supply for premium-quality offices in the best locations. In both the City and the West End, vacancy rates for prime offices are below 1%, versus a long-term average of closer to 7% or 8%, according to data from Knight Frank.
And supply is only expected to become scarcer. By 2028, the central London office market is expected to face a severe shortage of “Grade A” premium space. Two-thirds of the space currently being developed and due to complete this year is pre-let (including GPE’s 321,000 sq ft 2 Aldermanbury Square building to law firm Clifford Chance). Knight Frank is projecting that less than 1m sq ft of new offices will reach practical completion in 2028, which is only a fraction of the long-term average take-up level for new and refurbished space.
Management bullish
It is within this context that management teams have been as bullish as they have been for a while. Both GPE and DLN have guided rental growth of between 4% and 7% for their 2026 financial years, with GPE guiding even higher at 6%-10% for the best spaces.
Recent activity is encouraging. DLN signed £11.3m of new leases in 2025 at 9.9% above previously estimated rental values (ERV), and increased rents across the rest of its portfolio by 6.4%. Over the next five years, management has estimated that leases expiring and rental reviews will drive up rents in the existing portfolio by about 30% per sq ft.
Greater returns can be had in developments. Flagship prime projects from the three listed developers include DLN’s 50 Baker Street (which is expected to achieve a 25%-plus profit on cost), GPE’s 30 Duke Street (anticipated to deliver a profit on cost of 39.5%), and HLCL’s 10 King William Street.
Driven mainly by the capture of rental reversion and the leasing of development projects, both GPE and DLN have forecast substantial earnings uplifts – with GPE expecting a three-fold increase over the medium term and DLN forecasting 25% to 30% by 2030.
Second-order effects of AI on job losses and office tenant demand are as yet unknown. Although AI’s ability to automate certain white-collar jobs (particularly in entry-level and back-office roles) undeniably poses a risk of job dislocation, there is a strong counter argument that economies will adapt, and AI will lead to higher productivity and job growth.
With extremely compelling fundamentals, the outlook for prime central London offices is healthy. If vacancy was higher, demand not so intense and the development pipeline greater, nervousness around the ability of the listed London office developers to deliver growth would be justified. At circa 40% discounts to NAV, a substantial margin of safety is already baked into the current valuations and in fact look overdone.
