Demand up 16% for London offices in 2014

The London office market produced its best performance since 2000 last year with take-up of office space in central London rising by 16% to 15.9 m sq ft, according to new figures from Knight Frank. This is well ahead of the ten year average figure of 13.0 m sq ft. 

Key office leasing market points:

• Supply of office space fell by 20% in 2014 to 12.9 m sq ft; the lowest level since 2000.
• Office rents in the City of London increased by 4% to £62.50 per sq ft, in response to a 24% fall in supply.
• In the Northern City district, which covers the tech-biased areas like Shoreditch and Clerkenwell, rents were up 5% to £52.50 per sq ft.
• Rents in the prestigious Mayfair district increased by 10% to £107.50 per sq ft.

Dan Gaunt, a leasing partner at Knight Frank, said: “The office market has moved in favour of the landlord thanks to a large fall in supply. Demand levels remain strong going into 2015, particularly from the up-and-coming digital and creative industries. Consequently, I see rents rising this year by another 10% in the City, 9% in the Northern City, and 7% in Mayfair.”

James Roberts, chief economist at Knight Frank, said: “The growing influence of the technology sector on the London economy is borne out by the numbers. Digital and creative firms were the largest source of office demand in 2014, which is the fourth year in a row, as firms like Amazon, Google and Twitter expand in the capital.  This demonstrates that London is re-balancing away from its previous over-reliance on the financial services sector, and is growing as a global hub for digital innovation.”

Key investment market points:

• Investment sales volume for 2014 was £19.4 bn, which is in line with 2013’s figure of £19.6 bn and well ahead of the ten year average figure of £13.1 bn.
• 75% of sales by value were to overseas investors.
• Key deals included the Qatar Investment Authority buying the HSBC Tower for £1.2 bn, and Brazil’s Safra Group acquiring 30 St Mary Axe (a.k.a. the Gherkin) for £726 m.
• Capital values rose in almost every district.

Nick Braybrook, an investment partner at Knight Frank, said: “To have seen sales in 2014 nearly match the record figure of 2013 speaks volumes about the underlying strength of demand. Investors are being drawn to London as the rental growth is coming through, and yields of 3.75% to 4.25%” for London offices look high when bond yields in Europe are below 1% for the leading nations. That is a big spread and I expect it to narrow in 2015 as London property values increase again.”

Stephen Clifton, partner and head of central London offices at Knight Frank concluded: “2014 was an impressive year for central London in both the leasing and investment markets. The capital has built up new industries since the financial crisis, particularly in new technology, which have taken offices in up-and-coming districts, like Shoreditch, Southbank, and King’s Cross. But their influence – in regards to innovation and ambition – can be felt across Central London as other sectors compete for space and talent.”

“As tenant demand has migrated into the new districts, the investors have followed, and values have increased – an office market equivalent of the ‘gentrification effect’ seen in the housing market. This year I see more investors looking at development sites, in order to take advantage of the 20% fall in supply that occurred in 2014 which is pushing up rents”.

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