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London Commercial Property Market takes long pause

4 July 2011


Figures* released by
Capita Symonds – part of The Capita Group Plc – show a second consecutive quarter of low activity in the central London commercial property market.

Central London office take-up in Q2 2011 was below the historic quarterly average (since March 1999) of three million sq ft for the second consecutive quarter. Take-up in the City was at particularly low ebb - down by 22% over the previous quarter to 605,000 sq ft and down 36% on the same quarter last year (949,000 sq ft).

Take-up in the West End fared better, but was down on the previous quarter by 9% to 722,000 sq ft and reflected a 35% reduction from the level achieved in the same quarter in 2010.

...London inevitably reflects what is happening in the wider world and there is increasing evidence of a slowing world economy. Add the impact of high oil prices and the Eurozone crisis and there is an understandable caution in boardrooms...

Alan Dornford, director - markets, Capita Symonds, said: Although it is too early for this to be called a trend, it is evident that businesses are staying put and the office market is biding its time. Even allowing for the disruption of the extra bank holidays, the last quarter has seen fewer transactions and less space being let.

As a city highly influenced by global trends, London inevitably reflects what is happening in the wider world and there is increasing evidence of a slowing world economy. Add the impact of high oil prices and the Eurozone crisis and there is an understandable caution in boardrooms. This caution is translating into a reluctance within businesses to move, invest, or take on new staff, with direct knock-on effects on the office market.”

The figures come after two years of high activity driven by business upgrading space and capitalising on inducements on offer from landlords. As supply has shrunk and landlords have adjusted their pricing, the options for businesses looking to move have reduced and the financial case isn’t necessarily as compelling as it once was. The market is therefore now much more dependent on growth in the economy – new businesses coming into London and existing businesses adding more staff.

Investment

Although the short-term outlook for growth looks uncertain, London’s office market is still perceived as a ‘safe haven’ for investors. In the last 17 years London’s economy has grown at an annualised average of 3% while the national UK economy has grown by an average of 2.2% a year.

Andrew Mercer, director - investment, Capita Symonds, “Landlords can take heart from figures released by recruitment specialists Morgan McKinley** which show a reasonably positive employment picture with over 5,000 job vacancies in the City, far above the low of 2,000 in January 2009. This is further supported by the very limited amount of Grade A space in the pipeline - just 1.3 million sq ft is scheduled for completion in the City in 2011 and 380,000 sq ft in the West End.

There is also currently no office space under construction at all in several areas including City Fringe and Docklands, contributing to the historic low of new space scheduled for completion in London in 2012. In the core central London markets of City, Midtown and West End just 640,000 sq ft of newly developed space is scheduled to complete in 2012. This compares with a long run annual average for development completions of 3.7 million sq ft. Outside this core the only substantial completion scheduled for 2012 is the Shard where 586,000 sq ft is available.”

Rental

Rents in the City are currently in the region of £55 per sq ft, some 4% up since the beginning of the year. Higher rents are also being achieved in the West End but even there comparatively few rents have been achieved above £70 per sq ft.

Alan Dornford, Capita Symonds, says: “Talk of West End rents galloping ahead to £100 per sq ft now looks a little premature. The two tier market of high demand for Grade A space, but much weaker demand for other space, will continue to be a key feature of the central London office market with rents expected to continue their faltering, but upward, trend until at least 2014 when the supply of new property will begin to cool things down.”

* For a full copy of the report click here

**
www.morganmckinley.co.uk/news/morgan-mckinley-london-employment-monitor-may-11

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