London office rents to increase by a quarter

A return of confidence in the economic outlook will see London office rents reach an historic high by 2018 according to Knight Frank.

The key findings presented last week were:

– Prime rents in the City rose by 9.1% to £60.00 per sq ft year-on-year, driven by a 40% rise in office take-up to 8.1 m sq ft. The forecast is for City rents to rise to £65.00 per sq ft this year, and then to £75.00 per sq ft by the end of 2018, an increase of 25%

– Prime rents in the West End increased by 2.6% to £97.50 per sq ft, as take-up rose by 46% to 5.0 m sq ft. The forecast is for West End rents to rise to £105.00 per sq ft this year, and then to £120.00 per sq ft by the end of 2018, an increase of 23%

– This follows a revival in demand for office space in Central London in 2013, where take-up increased by 41% to 13.1 m sq ft

– Technology and media firms were the largest source of demand across central London, with major deals signed by Google, Amazon, Facebook, Twitter, News Corp, and Ogilvy & Mather.

– The investment volume for the central London office market hit a record high of £19.6 bn, an increase of 42% on 2012, and 14% greater than the next highest year which was 2007.Supply fell from 16.5 m sq ft in 2012 to 16.1 m sq ft at the end of 2013. This reflects a vacancy rate of 7.0%, which is below the ten year average figure of 8.5%, and its lowest level since Q2 2008.

– Take-up in Docklands increased by 19% to 564,000 sq ft, with deals by KPMG, HSBC, and Shell.

Commenting on the figures, Stephen Clifton, head of Central London at Knight Frank said: “London’s office market rebounded last year, and the momentum is set to continue. As well as a rising economic tide, the capital is set to benefit from upcoming infrastructure projects like Crossrail and the Northern line extension.

“Also, entire new districts are emerging like London Bridge, Battersea and Nine Elms, where offices, residential, retail and leisure, sit alongside each other, as London transforms into a Manhattan-style live-and-work city.”

James Roberts, head of commercial research at Knight Frank said: “The figures demonstrate how London’s economy is successfully rebalancing away from finance. The Technology, Media and Telecoms or TMT sector accounted for nearly 4 million sq ft of take-up in 2013, which is more than double the 1.9 m sq ft figure for the financial sector.

“This is nearly a complete reversal of the situation in 2007, when we saw 3.7 m sq ft of finance take-up, and 2.0 m sq ft of TMT deals. Moving forward we see more diverse demand coming through as the economy continues to strengthen, like ‘Fin-Tech’ firms, who straddle the worlds of finance and technology.”

Philip Hobley, head of West End leasing, Knight Frank, said: “A lot of firms in 2011 and 2012 were put off launching office searches by the worrying economic news, but there was more confidence around in 2013, hence the 41% rise in take-up.

“With the vacancy rate already low by historic standards and on a downwards trend, many of those launching office searches this year and next are going to be surprised by how limited their options are, and this will generate competitive bidding for the best quality buildings.”

Nick Braybrook, head of City investment at Knight Frank, said: “Global investors quickly redeployed from safe havens like bonds and gold, to growth facing investments in 2013, and London real estate has been high on the shopping list.

“Now buyers are looking for buildings which offer exposure to the rental cycle, and consequently development sites are drawing more interest. With the prospect of rents increasing by a quarter over the next five years, and the economic news appearing to support such forecasts, I see continued strong investor interest in 2014.”

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