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Record Rise in City of London Office Rents

5 October 2010



NB Real Estate, a division of Capita Symonds, has revealed that office rents in the City of London have rocketed by almost 25% so far this year - the strongest three quarters of rental growth since records began.

Average rents for Grade A offices in the City increased from £42.50 per sq ft in Q1 2010 to £53.00 per sq ft in Q3 2010.

NB Real Estate says that the sharp rise in City rents is partly being fuelled by a lack of new buildings being delivered to market. Supply of available space has slumped to a two-year low. Over the last 12 months availability has decreased by 27% from 8.6 million sq ft available in Q3 2009.

James Gillett, Director of City Offices at NB Real Estate, comments: “Rents have rebounded 25% so far this year as vacancy rates have fallen and the supply of high quality space has dwindled. Demand for new space has recovered sharply, but this is in stark contrast to demand for second-hand space which is still very subdued. Prospective tenants are increasingly locked in bidding wars for Grade A space, which should continue to push rents North for the foreseeable future.”

“New construction activity ground to a halt with the onset of the credit crunch.  Rising rents are now encouraging developers to dust off their plans, though access to finance is still a constraint, and many of these buildings will take several years to bring to market. We expect shortage of prime space to become much more acute over the next year or so. There is a strong appetite across both the City and West End for developments that have consent and can be delivered in the 2012–2014 window.”

NB Real Estate says that although there is a shortage of the highest quality stock, lower quality space is in much more plentiful supply.

James Gillett says: “It’s very much a tale of two cities. While demand for Grade A space is robust, enquiries for properties in secondary locations are often not being followed up. This disparity looks set to become more marked with rents continuing to rise for new space but stagnating for everything else.”

“A key driver behind most take up of Grade A space has been upgrading: businesses moving to better quality accommodation while taking advantage of the terms available in a down cycle. Growth might have been part of it but the majority are leaving space behind and there is a real danger the market will be oversupplied with lower grade space when the Grade A pool runs dry. Why move from grade B to Grade B when your existing landlord will be at pains to incentivise you to stay? In the short term we expect to see more pre-commitments to new developments as the speculative pipeline fails to meet demand.”

“Good news as well for developers of Grade A space outside the core sub-markets. Areas such as Kings Cross, Stratford and Greenwich which have strong fundamentals but historically the wrong post code will undoubtedly benefit from a wider interest pool as a consequence of the supply shortages.”

NB Real Estate points out that City of London rents are still way below their peak of £69.50 per sq ft in Q3 2007. Office rents across London have tumbled since the end of 2007 and hit a floor in Q4 2009 before rocketing again in Q1 10.

Having bounced back dramatically following the financial crisis rents at Canary Wharf are now stabilising. With the development pipeline empty from 2011, growing occupier demand could feed through to further rent increases.

Rents in other Central London office markets have continued to move upwards – though at a more subdued rate than in Q1 2010. Rents for Docklands offices remained at £40 per sq ft in Q3 2010. Canary Wharf rents have leapt by a third since the start of the year. In the last 12 months availability has decreased by 32% from 2.4 million sq ft available in Q3 2009.

James Gillett says: “Having bounced back dramatically following the financial crisis rents at Canary Wharf are now stabilising. With the development pipeline empty from 2011, growing occupier demand could feed through to further rent increases.”

Rents in the West End have increased by 4% over the last 12 months from £65.00 per sq ft in September 2009.

According to NB Real Estate, the West End has a more diverse occupier base and less exposure to the fast recovering investment banking and fund management industries which are driving rental growth in the City. As a result, rents in the West End held up relatively well despite the credit crunch and recession, and rental growth has been much more subdued over the past year.

NB Real Estate says that yields on central London offices have been driven down over the past 12 months, as the expectation of further rental growth and an influx of foreign investors taking advantage of the weak pound has brought buyers flooding into the market.

Yield on City offices have fallen from 7% to 5.25% over the past 12 months. Yields on West End offices have come down from 5.75% to 4.5% over the same period.

Andrew Mercer, Director of Central London Investments at NB Real Estate, says: “With the amount of available space shrinking and capital values rising, banks have started to cash in by selling assets. Banks still have enormous property portfolios to shift, but the fear that they would dump stock and destabilise the market have so far proved unfounded.”