Occupiers face fight for space amid rising rents

The vacancy rate over the quarter fell from 5.9% to 5.4%, the lowest level since January 2009.

However, in certain submarkets – for example, Soho – the stock shortage brought around a vacancy rate of 3%. Cluttons expects this pressure to intensify over the next two years, as a large number of occupiers with leases taken out in 2006/07 face breaks or expiries.

Over the last quarter, Cluttons confirms that there has been a 20% increase in West End space under construction, all of which is speculative.

While these developments will offer a temporary and partial easing of occupier demand, Cluttons anticipates that pre-lets will increase to fix costs given the prospect of higher rents over coming years. While a surge in pre-lets will enable some occupiers to move to a preferred location within the West End, others will look to edge of core locations to contain costs.

Cluttons also reports that investment volumes remain buoyant, as investors look to wealth preservation through good quality stock which provides a stable return. Prime West End yields are at 4% with Mayfair and St James’s transactions closing in around this figure.

A further significant hardening in yields is not anticipated over the coming months. However, there is growing interest in the repositioning of investments through the re-development, refurbishment and asset management opportunities presented by more secondary stock. Opportunities outside of the prime Mayfair and St James’s core will gain increasing attention throughout 2011.

John Wood, Head of Cluttons’ Commercial division, said: "Over Q1 2011, we’ve seen a cooling in take-up and occupier demand as well as significant improvements in the West End development pipeline. However, these trends need to be put into context as development activity as a whole remains below the 10-year average, while the vacancy rate across the West End sits well below the long run average.

"Accordingly, we fully expect things to get more challenging for occupiers before they improve and forecast that West End rents will rise by an average of over 8% per annum over the next four years."

Have your say on this story using the comment section below