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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