Supply crunch drives London office rental growth

The imbalance between demand and supply will change the face of many districts as competition for space in core markets causes displacement of tenants.
 
A similar demand / supply imbalance in the investment market will also drive pricing through restricted available stock in the core markets and increasing overseas demand, particularly from the Far East. Knight Frank predicts the strongest performance will be from good secondary stock or refurbishment opportunities, with the timing of letting and exit holding the key to maximising value.
 
Highlights
 
– City prime rents are forecast to increase by 9.1% in 2011 to £60.00 per sq ft (up from £55.00 per sq ft in 2009), as economic growth bolsters occupier sentiment in the second half of the year. Rents are forecast to rise to £67.50 per sq ft by 2012.
 
– Supply in the City fell by 15% in 2010 to 10.4 m sq ft, and a further decline of 5% in 2011 is forecast, taking availability down to 8.8 m sq ft
 
– 2011 is expected to see just 0.85 m sq ft of speculative new development delivered to the market – average take-up for new & refurbished space is 3.2 m sq ft per annum. This will create intense competition for good quality space and will tighten supply conditions into 2012.
 
– City prime investment yields are forecast to fall by 25 basis points to 5.00% in 2011, as demand from overseas investors strengthens.
 
– Having recorded the strongest of levels of growth for a decade in 2010, West End prime rents are forecast to record further growth of 17.6% in 2011 to £100.00 per sq ft (up from £85.00 per sq ft in 2010 which reflected 30.8% growth for the year), as the market faces supply pressures in Mayfair / St James’s and a growth in demand from a resurgent hedge fund sector.

– Availability in the West End is projected to fall by 7% in 2011 to 6.0 m sq ft, as existing new space is transacted and tenants with a business need to relocate focus on good quality second-hand options.
 
– There is just 209,000 sq ft under construction speculatively in the West End that is due for completion in 2012. Faced with the prospect of continued strong rental growth, tenants with requirements for a 2013 relocation are expected to commit early to pre-lets in those buildings which are under construction and due for delivery that year. Average new and refurbished take-up is 1.7m sq ft per annum.
 
– West End prime investment yields are forecast to remain at 4.00% in 2011, as demand from foreign investors grows, Sterling remains good value and interest rates are low.
 
James Roberts, head of central London research, Knight Frank said: “With Sterling low by historic standards, more foreign money will be coming to London and creating jobs. I see Asia-Pacific companies expanding in London in the next few years, as history shows that rising nations in time move from being exporters of manufactured goods to exporters of investment capital. London, with its long-standing ties with locations like Hong Kong and Singapore, is well positioned to become the East’s beachhead for branching into Europe.”
 
Tim Robinson, leasing partner, Knight Frank said: “This cycle is being driven by a lack of supply, and over the next two years, as business expansion appears on the agenda, it is a certainty that the availability of new space will be inadequate to satisfy demand. We expect all core markets to achieve new record headline rental levels.”

Stephen Clifton, investment partner, Knight Frank said: “Central London is the gold bullion of world property markets with strong rental growth driving investment performance. Prime yields will remain under pressure in 2011, however good secondary product and refurbishment projects will be the strongest performers.”   

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