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Report heralds start of recovery in Central London Commercial Property

11 January 2011



Figures* released by Capita Symonds’ real estate division have revealed that the central London commercial property market began to recover significantly in 2010, with rental values rocketing and demand for grade A space far outstripping supply - despite a gloomy Q4 which ended with a sharp fall in take-up of offices across central London markets and little movement in rents.

In terms of rental values, there was an overall rise across the capital in 2010 of 14%. The parts of London with notable rises include the City, where headline rental values increased by 25% from £42.50 per sq ft (psf) in December 2009 to £53.00 psf in December 2010, and Docklands where headline rental values have soared by 33% from £30.00 psf in December 2009 to £40.00 psf in December 2010.

City and Docklands rents, which peaked in September 2007 at £69.50 psf and £50.00 psf respectively, are now back to December 2008 levels.

In 2010, take up rates (including lettings, sales to owner occupiers and pre-lets) increased across London by 37%. In Q4, however, take-up rates fell by 41% compared to Q3 reflecting the dearth of viable new office stock. The problem was particularly acute in the City where take-up rates fell 74% in Q4 after having grown by 42% across the year as a whole.

Although the take up of offices across central London fell sharply in the last quarter of 2010, with rents also stagnating, prime rents are stable or rising in all sub-markets and investment volumes have started to increase, driven heavily by overseas investors.

...The last quarter of 2010 ended with a sharp fall in take-up of offices across central London markets and little movement in rents. But the low key end to the year disguised the fact that 2010 overall has been a year in which central London markets have recovered strongly...

Meanwhile vacancy rates have fallen with an overall drop across the capital to 8.0% from 9.1% in 2009. In particular, inner London office availability decreased by 12.5% in 2010 with the largest percentage decreases being seen in Midtown (26%) and the South Bank (17%).

With regards to 2011, the marked disparity between high demand for grade A space, heavily driven by stock shortages, and inertia in the rest of the market that has been such a feature throughout 2010, is set to continue into this year and beyond. The buoyancy of the central London office sector also contrasts starkly with the picture elsewhere in the country - particularly the north - where little new development is evident and rents generally remain stagnant.

“The factors propelling the central London market, including the resurgence of the financial sector and strong interest from overseas investors, are likely to see the gap widen still further in 2011, particularly given that demand for office space in other regions will be more heavily constrained by public sector cuts and rising unemployment,” says Alan Dornford, director, Capita Symonds’ real estate division.

He continues, “The last quarter of 2010 ended with a sharp fall in take-up of offices across central London markets and little movement in rents. But the low key end to the year disguised the fact that 2010 overall has been a year in which central London markets have recovered strongly.

...While most office markets will continue to struggle, tenants in the capital will bemoan the lack of available stock and increases in the costs of occupation, although there will be further new development starts, something that is pretty much unheard of elsewhere in the county...

“At the root of this performance is the dwindling stock of grade A space and a development pipeline which is at an historically low level. In the city, for example, just 1.3m sq ft is scheduled for completion in 2011, with nothing beyond that. This year we would expect to see central London really sitting at odds with the rest of the UK. While most office markets will continue to struggle, tenants in the capital will bemoan the lack of available stock and increases in the costs of occupation, although there will be further new development starts, something that is pretty much unheard of elsewhere in the county.”

The fortunes of individual central London markets have also varied widely during 2010 with the City and Midtown markets registering a much stronger recovery than the West End.

...The City market has certainly been on a roller coaster ride this year with take up sharply up in the first quarter, falling back in the second quarter, surging again in the third quarter and now falling back in the final quarter to levels last seen at the beginning of 2009...

James Gillett, director, Capita Symonds’ real estate division, says: “The City market has certainly been on a roller coaster ride this year with take up sharply up in the first quarter, falling back in the second quarter, surging again in the third quarter and now falling back in the final quarter to levels last seen at the beginning of 2009. However, looking at any one quarter can be misleading as the picture can be skewed by just one or two big deals. Overall, take-up during 2010 has been well up on that in 2009 whilst achievable rents, although flat in the final quarter, have surged by 25% in the course of the year. Capital values, too, have shown steady growth.

“The West End, meanwhile, has been less volatile but has also recovered more slowly. The decrease in take-up during the last quarter was less than that in the City but still 41% lower than the previous quarter. Nonetheless, take-up overall in 2010 is well up on that in 2009, albeit that the level of take-up has been declining consistently throughout the year.”

* For a full copy of the Capita Symonds report please click here