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Figures Reveal Mixed Outlook for London Property Market

4 October 2011



Figures* released today by
Capita Symonds, part of The Capita Group Plc, reveal a mixed outlook for the London commercial property market.

The market – driven by the City and West End - continues to be one of the few property sectors to enjoy capital growth and sustained rental levels, demonstrating its lasting appeal to international and institutional investors compared with more volatile investment options.

The figures also show, however, that the market is coming under some strain. Q3 marks the fourth consecutive quarter that central London (City, West End & Midtown) take-up has been below its long run quarterly average of 2.4m sq ft. The period also saw the first increase in central London availability since June 2009. What had previously been considered as a pause in the market is now establishing itself as a trend, reflecting an economic climate in which businesses are reluctant to commit to expansion or relocation.

In terms of capital growth, the most recent IPF Consensus Forecast** implies that City and West End offices are the only property sectors expected to grow in 2011 and 2012. The subsequent appeal of the market to international and institutional investors is reflected in the fact that in 2011 so far 49% of all investments were purchased by sovereign wealth funds and other overseas investors, private property companies and private individuals. These include:

  • Norges Bank Investment Management’s (NBIM) purchase in April of a 150 year lease on a 25% stake in Regent Street for £452m;
  • The Indonesian Kuok family’s £288m investment in the Aviva Tower in April 2011;
  • Chinese Estates purchase of Goldman Sachs’ London HQ at 120 Fleet Street for £280m in January 2011.

Rental levels also held firm across the capital and in some isolated cases, rents in the West End have been reaching £100 per sq ft.

The flipside, however, is that central London office take-up in Q3 was just 1.8m sq ft - down almost 1.7m sq ft against Q3 2010. Take up levels for Q3 were lower across most submarkets, with Midtown suffering the greatest percentage decrease - down by 38% to 385,000sq ft from 616,000 sq ft in Q2.  The West End fell less sharply down by 15% to 744,000 sq ft from 873,000 sq ft, while the City was down by 6% from 698,000 sq ft to 658,000 sq ft.  Only the Docklands and Southbank bucked the trend due to one or two large transactions in these smaller markets.

...The continued global instability has created a dichotomy within the London property market – enabling it to maintain its appeal for investors by providing capital growth and rental stability, while occupier demand continues to dampen as businesses lack the confidence to commit to expansion plans or relocate to new premises...

Rob Cass, director of investment, Capita Symonds, said: “These figures simply reflect the economic uncertainty we are facing here in the UK and the volatility of international markets. The continued global instability has created a dichotomy within the London property market – enabling it to maintain its appeal for investors by providing capital growth and rental stability, while occupier demand continues to dampen as businesses lack the confidence to commit to expansion plans or relocate to new premises.

“The conservative occupier outlook has been demonstrated by the lack of major demand for large floor plates even in prime City locations throughout 2011, with only a few deals recently completed above 75,000 sq ft. We are even beginning to see some of the major new developments - such as the 400,000 sq ft scheme at Walbrook, or the 94,000 sq ft scheme at 95 Gresham Street - looking at strategies that now embrace multi-let tenancies rather than single tenants. This shift is in direct response to lower levels of demand.”

Secondary market

Andrew Mercer, director of investment, Capita Symonds, said: “The cautious tone of investors who consistently return to prime in more challenging times has only emphasised the uncertainty on outlook for secondary locations. There are already signs that a ‘flight to quality’ is beginning to undermine the signs of modest recovery that were emerging in the secondary market earlier in 2011. However the secondary office market will still provide some good investment opportunities.

 “The central London secondary market will continue to offer attractive investment opportunities in the form of well-let investments or multi-let buildings in good locations offering low rents. Even secondary offices in central London provide investors with a relatively stable investment platform compared with many other global cities and alternative investments." 

* For a full copy of the report click here.

**August 2011. Investment Property Forum UK Consensus Forecasts; a survey of independent forecasts for the UK commercial property investment market.

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