Strong, focused occupational demand coupled with a lack of new high-quality supply provide a solid foundation for our City investment thesis.
In 1994 the US was hosting the World Cup, Garth Brooks had just played his first (and until this summer his only) London gig at what is now the OVO Arena Wembley and the original Crossrail / Elizabeth Line proposal was rejected by Parliament.
This was the last time that West End and City yields moved broadly in lockstep, with the City playing a supporting role ever since. The early 1990s recession, as well as the collapse of Barings in 1995 made the City and its financial institutions appear riskier and more volatile. By contrast, the West End started to boom, first with technology and media businesses in Soho followed by the early waves of private equity and hedge funds that accelerated into the 2000s creating an elongated period of demand. This divergence continued through the GFC, when the City’s institutions were rocked by the global financial turmoil and by an oversupply of new and grey space impacting the City’s growth.
Thirty-two years later, Garth Brooks came back to London this summer, the World Cup returned to North America, and the Elizabeth Line is now reshaping connectivity across London. I doubt many would have predicted the course the London property market would take in the intervening three decades, nor will I attempt to predict the next three. However, I do believe that demand both for occupiers and owners will increasingly be shaped by proximity to the Elizabeth Line, a trend which we are already seeing in rents around stations like Bond Street, TCR, Farringdon and Liverpool Street.
The big question is, will this also show up in yields and capital values as owners recognise the locational advantage these assets possess leading to a new locational divide – being on the line or not – which we believe should increasingly benefit the City.
Resilient occupational demand for the right assets in the right locations
Despite a significant growth in AI-related demand, the financial and banking sectors remain the main source of tenant demand in central London with Savills recording 5.8 million square feet of active demand at the end of Q1 2026, a new record and a 30% increase since the start of the year. Most of this is concentrated on the City core with firms having a strong preference to remain near key institutions such as the Bank of England and Lloyds as well as close to key transport nodes, most notably the Elizabeth Line at Liverpool Street and Farringdon. Banking, financial services and insurance firms remain highly sticky in their demand, with only 40% relocating to a new postcode vs a market average of 54% (65% pre-Covid). Professional services provide a durable second source of demand, with 3.6m sqft of active demand currently. HSF’s pre-let at 1 Appold Street was the largest professional services deal so far in 2026 and again demonstrates the trend we have seen for the big law firms to pay top rents for top buildings around Liverpool Street and Farringdon.
Notably, Savills state that the vacancy rate in H1 2026 in the City core was 5.9% (200bps below the 10-year average) vs the City fringe at 8.0% (150bps above the 10-year average). This directly translates into higher prime rents with an average prime rent in Q2 2026 of £117 psqft (+19% YoY) and a new record top rent of £160 psqft paid by Latham & Watkins at One Leadenhall (a 31% jump on the previous record in 22 Bishopsgate in 2024).
These higher rents reflect the significant construction cost inflation since 2021 but also highlight a lack of high-quality space and significant competition for the best assets. Perhaps more importantly, it also demonstrates that City occupiers can and will pay rents that five years ago were unthinkable outside of certain Garden Squares in the West End.
Development will not resolve this quickly
Supply of new stock is expected to decrease further from current levels as viability continues to have a significant impact on new build construction. It should be noted that only one of 15 new starts in London in H1 2026 was for a brand-new development, that being Delta at Paddington.
In addition, a significant proportion of the space due to complete in the near term has already been committed, materially reducing the volume that will be available to occupiers on a speculative basis. Savills report that ~35% of the 7.7m sqft of completions expected in 2026 have been pre-let already.
This is likely to push vacancy rates lower and lead to continued strong rental growth across core sub-markets.
Capital markets: the occupational story has not yet been priced in
The occupational picture described above is not yet reflected in the capital markets. Investment volumes in the City remain well below the long-run average as different pools of investors, for various reasons, have not returned en masse to the market.
This means that when looking for evidence of core deals, particularly in the City, there is a real lack of transactional activity as owners of better-quality assets, that are not forced sellers, continue to see significant reversion and benefit from attractive and competitive financing. On the flip side, the assets we do see coming to market typically need repositioning with increasing capex requirements in the short to medium term. Many of the existing owners of these assets have reached the end of fund lives or are underwater on their equity and so are unwilling or unable to spend that money.
We see that dislocation as the opportunity rather than the risk. Pricing for well-located refurbishment stock currently reflects a scarcity of competing capital, not a scarcity of occupier demand. The ability to acquire existing stock at an attractive basis (at a fraction of the replacement cost) and deliver that stock, once refreshed, into a market where tower vacancy (a proxy for prime) sits below 1 per cent and demand remains strong. That is an unusual combination that doesn’t adhere to the principles covered in the lectures I sat through as an economics student, where strong demand was offset by increased supply and the market always reached equilibrium.
We do not expect this window to stay open indefinitely, but we intend to take advantage of it selectively as it continues.
Going back to my initial premise, will City yields converge with the West End? As the macro environment normalises and institutional capital returns, we expect competition to concentrate on the same small group of buildings that occupiers are competing for: modern, well-connected floorplates in the West End and, increasingly, the City core. A market with a shrinking development pipeline, a broadening occupier base and record rental evidence.
While the West End’s value comes from constrained supply, fragmented ownership and the enduring pull of its location, the City combines prime scarcity with a spread of demand across finance, law, professional services and tech. As core buyers return, we believe the resilience and breadth of that income will be important.
I am not going to predict what the next 32 years will bring. What I do know is that, at Lugus, we will continue to look for the best risk-adjusted returns from assets in strong micro locations. The question, to borrow from Garth Brooks, is whether other investors will remain satisfied on the shoreline or dare to dance the tide.
Sources: Savills Central London Office Market Watch updates