Key Points
- Global risk‑off sentiment following the outbreak of war‑related tensions in the Middle East has hit real estate equities hard, with March 2026 ranking among the worst single‑month performances for the sector since 2008 and 2020.
- London‑listed office developers Derwent London (DLN), Great Portland Estates (GPE) and Helical (HLCL) are trading around 40%–45% below their estimated net asset values (NAV), reflecting a deeply discounted valuation for prime‑London‑focused REITs.
- Underlying fundamentals for central London offices are strong: demand for space reached a record 14.6 million sq ft, 57% above the 10‑year average, according to Savills data.
- First‑quarter 2026 leasing in central London totalled 2.2 million sq ft, up 6% on the same period in 2025, with Grade A and pre‑let space accounting for the bulk of take‑up.
- Major leasing deals in 2026 include Herbert Smith Freehills’ 268,000 sq ft letting in the City, BP’s South Bank pre‑let, Databricks’ c.135,000 sq ft in the West End, and Microsoft’s Art Deco Soho building for its UK AI teams.
- An array of AI‑focused firms, including OpenAI and Anthropic, have taken space at Regent’s Place, while Microsoft is said to be seeking a c.300,000 sq ft Elizabeth Line‑linked HQ to consolidate its London workforce.
- Prime rents in the City rose 24% quarter‑on‑quarter and 40% year‑on‑year to £130 per sq ft in Q1 2026, with a new City record of £160 per sq ft reported; West End prime rents held steady at c.£165 per sq ft.
- Knight Frank estimates that prime City rents have risen 46% since 2020 and prime West End rents 68% over the same period, despite widespread working‑from‑home concerns.
- Vacancy rates for prime offices in both the City and the West End are below 1%, versus a long‑term average of around 7–8%, sharpening the scarcity premium for high‑quality stock.
- By 2028, central London could face a severe “Grade A” supply shortage, with less than 1 million sq ft of new offices expected to complete, a fraction of long‑term average take‑up.
- Two‑thirds of office space currently under development in London is already pre‑let, including GPE’s 2 Aldermanbury Square (321,100 sq ft) to Clifford Chance.
- Both GPE and DLN have guided 2026 rental growth of 4%–7%, with GPE targeting 6%–10% for its best spaces; HLCL is also benefitting from a sharply tightening supply‑demand balance.
- In 2025, DLN signed £11.3 million of new leases 9.9% above its estimated rental values and increased rents across its wider portfolio by 6.4%, with management projecting around a 30% average rent uplift over the next five years.
- Flagship projects such as DLN’s 50 Baker Street (targeting 25%+ profit on cost), GPE’s 30 Duke Street (c.39.5% surplus to cost) and Helical’s 10 King William Street illustrate the upside potential in development pipelines.
- Management at both GPE and DLN forecast substantial earnings growth, with GPE eyeing a threefold increase over the medium term and DLN guiding to 25–30% higher earnings by 2030.
- The second‑order impact of AI on job numbers and office demand remains uncertain, but the prevailing view among many analysts is that AI‑driven productivity gains will ultimately offset any automation‑related headcount reductions.
- Given record‑low vacancy, strong leasing momentum and constrained supply, the current 40%–45% NAV discount for London‑office‑focused REITs appears to some investors “overdone” relative to the underlying fundamentals.
Central London (The Londoner News) May 8, 2026 – Why the market may be too bearish on London officesLondon’s listed office landlords are trading at steep discounts to their underlying property values even as occupier demand hits record highs, a divergence that some analysts cast as evidence the market is over‑punishing London offices for geopolitical and rate‑related risks. March 2026 ranked among the worst months for real estate equities since the global financial crisis and the early days of the pandemic, and the sector’s London‑office sub‑segment has been hit particularly hard. Yet at the same time, demand for premium London office space has climbed to 14.6 million sq ft, 57% above the 10‑year average, according to Savills, while vacancy in prime locations has fallen to below 1%. As reported by analysts at QuotedData, the combination of record‑low supply and still‑deeply discounted share prices suggests the market may be “too bearish” on London offices.
Why are investors so pessimistic on London offices?
The first layer of pessimism stems from macroeconomic shocks rather than local fundamentals. As noted in a 5 May 2026 REIT review by QuotedData, real estate equities endured one of their sharpest sell‑offs in March 2026, alongside the peak of heightened tensions in the Middle East, which pushed expectations not for multiple interest‑rate cuts but for at least one quarter‑point rate rise.
Because real estate valuations are inversely correlated with interest rates, this shift dragged London‑focused REITs lower despite strong leasing activity.
The second layer of concern comes from the structural threat of artificial intelligence. As reported by several research outlets, including KPMG‑linked commentary on the London IPO pipeline, AI’s ability to automate white‑collar and back‑office roles has raised fears of job losses and reduced office‑space demand.
Construction‑cost inflation and the relatively rapid depreciation of office stock versus other real estate sectors have added to the bear case.
Among the most‑watched names, Derwent London (DLN), Great Portland Estates (GPE) and Helical (HLCL) now trade at roughly 40%–45% below their estimated net asset values, according to NAV‑focused analysts.
“At these levels, the market is almost pricing in a permanent collapse in London office demand,”
observed a London‑based REIT analyst cited in a 5 May 2026 QuotedData commentary,
“even though leasing data tells a very different story.”
How strong are London office fundamentals really?
The most striking data point is demand. As reported by Savills in a 6 May 2026 market note, active demand for central London office space reached 14.6 million sq ft, a record that is 57% above the 10‑year average.
First‑quarter 2026 take‑up amounted to 2.2 million sq ft, 6% higher than the same period in 2025, and around 92% of that demand was for Grade A or newly refurbished space.
About a third of Q1 take‑up was pre‑let, underscoring occupiers’ willingness to commit to long‑term commitments in premium buildings.
Several headline deals have highlighted the strength of the prime market. Savills and Knight Frank both note that Herbert Smith Freehills’ 268,000 sq ft letting in the City is one of the largest single‑market transactions so far in 2026.
BP’s pre‑let on the South Bank, Databricks’ roughly 135,000 sq ft in the West End, and Microsoft’s acquisition of an Art Deco building in Soho for its UK AI teams are also cited as bellwether deals.
Rents have followed this tightening supply. As highlighted in a May 2026 markets update, prime rents in the City rose 24% quarter‑on‑quarter and 40% year‑on‑year to £130 per sq ft in Q1 2026, with a new City record of £160 per sq ft recorded on a super‑prime lease.
In the West End, prime rents held steady at c.£165 per sq ft, but Knight Frank data show that since 2020, prime City rents have risen 46% and prime West End rents 68%.
Why are vacancy rates so low in prime London?
Vacancy in top‑tier locations is now at historic lows. As explained in a 2026 outlook piece by commercial consultancy Carter Jonas, vacancy rates for prime offices in the City and the West End are below 1%, versus a long‑term average closer to 7–8%. CoStar‑linked research cited on Reddit‑style forums notes that this has been driven by a combination of resurgent demand, investor caution on new schemes, and regulatory constraints on development.
The pipeline of new Grade A office space is sharply constrained. Carter Jonas expects that by 2028 central London will face a “severe supply shortage” of premium stock, with less than 1 million sq ft of new offices completing that year, a fraction of the long‑term average take‑up.
Two‑thirds of space currently under construction is already pre‑let, including Great Portland Estates’ 2 Aldermanbury Square (321,100 sq ft) to Clifford Chance, as confirmed in GPE’s November 2022 and March 2026 announcements. Analysts at Savills argue that this pre‑letting activity reflects
“confidence in London as a long‑term office hub,”
even as sentiment in the listed‑equity market remains weak.
How are landlords and developers responding?
Management teams at the main London‑office REITs have become markedly more bullish. As reported in a 5 May 2026 REIT review, both GPE and DLN have guided 2026 rental growth of 4%–7%, with GPE targeting 6%–10% for its best‑quality space. HLCL, while smaller and more reliant on large development projects, is also benefitting from the tighter market.
Derwent London has highlighted that in 2025 it signed £11.3 million of new leases at 9.9% above its estimated rental values and raised rents across the rest of its portfolio by 6.4%. Management expects that over the next five years leases expiring and rental reviews will lift rents in the existing portfolio by about 30% per sq ft.
Development projects are expected to drive even higher returns. As detailed in company announcements and market analyses, DLN’s 50 Baker Street development is targeting a 25%+ profit on cost, while GPE’s 30 Duke Street is projected to deliver a surplus to cost of around 39.5%. Helical’s 10 King William Street, a 140,000 sq ft scheme above the new Bank Station entrance, is being marketed as “beautifully designed, highly sustainable” Grade A space due for completion in 2026.
Both GPE and DLN have forecast substantial earnings growth as rental reversion and pre‑let completions feed through. QuotedData notes that GPE expects a threefold increase in earnings over the medium term and DLN a 25–30% rise by 2030.
Could AI really wreck London office demand?
The second‑order effect of AI on job numbers and office‑space demand remains a key unresolved question. As reported by KPMG‑linked commentary on financial‑services leaders, there is broad agreement that AI will automate some entry‑level and back‑office roles, but many executives expect net job growth as productivity rises.
A 2026 REIT note by QuotedData argues that if AI leads to higher productivity and higher‑value‑added work, the need for premium office space in connectivity‑rich locations such as central London could actually increase.
Carter Jonas’ 2026 outlook similarly stresses that occupier demand “remains highly polarised,” with weak demand at the lower end but strong appetite for best‑in‑class space in the super‑prime West End and along the City’s innovation corridors.
Microsoft’s decision to house its UK AI teams in Soho and its reported search for a 300,000 sq ft headquarters along the Elizabeth Line is cited by several commentators as evidence of this polarisation.
Why might the market be too bearish on London offices?
The core argument of the “too bearish” thesis is straightforward: if vacancy were higher, demand weaker and the development pipeline larger, current price‑to‑NAV discounts would be more justified. Instead, vacancy in prime central London is below 1%, demand is at a record high, and approved new‑build supply is tightly constrained.
As laid out in a 5 May 2026 REIT review, London‑focused landlords DLN, GPE and HLCL are all trading at roughly 40%–45% below their net asset values, implying that the market is discounting not just cyclical risk but a structural fall‑off in London office demand. “With extremely compelling fundamentals, the outlook for prime central London offices is healthy,” observed a London‑based property analyst quoted in the same piece. “At these discounts, the market is not just cautious—it looks overdone.”
For contrarian investors, the combination of record‑tight fundamentals and deep equity discounts suggests that the market may be mispricing the long‑term resilience of London’s prime office sector. What remains to be seen is whether broader real‑estate sentiment and interest‑rate expectations will eventually reconnect with the hard data on demand, rents and vacancy in the capital.
