London leads office market bounce-back (UK)

London's office market was hit hard and early by the global financial crisis, but in comparison with other leading financial centers it has been among the first to bounce back, according to the latest research from the leading commercial property consultant, CB Richard Ellis.

CB Richard Ellis report – How Did They Fare – A Comparison of Offices Markets in International Financial Centres – examines the impact of the credit crunch and recession on the occupational and investment markets for office property in London, New York, Hong Kong and Tokyo – four top-ranking international financial centres (IFCs).

Dr Peter Damesick, Head of UK Research for CB Richard Ellis, said: "International Financial Centre markets are specialised, share high exposure to financial markets, and are inherently volatile. However, our report reveals key differences between these four IFCs in terms of the effects of the crisis and the trends that have emerged as signs of recovery have appeared."

Office demand in New York and London was affected more quickly and directly by the global banking crisis than in the two Asian cities. In Hong Kong and Tokyo, the ensuing global recession, with collapsing production and trade, did the most damage to occupier demand. Tokyo's market saw only hesitant signs of recovery over the second half of 2009, while in both London and Manhattan there was a significant pick-up in office demand as financial market conditions improved.

London's office investment market was also an early casualty of the credit crunch, with values and turnover dropping sharply from late 2007; but pricing and activity rebounded over the second half of 2009, with strong demand from overseas investors. Hong Kong has seen an even shaper rebound in office values in 2009, almost re-gaining pre-crisis levels. In marked contrast, in the New York market, with its high dependence on securitised debt, investment activity almost ground to a standstill during the course of 2009.

Peter Damesick noted that recent trends held lessons for investors: "Capital flows are key drivers of real estate pricing in International Financial Centres, with impacts that are separate from and greater than any consideration of rental fundamentals or cyclical volatility. Investors should examine carefully whether perceptions of market stature and liquidity in IFCs lead to mis-pricing of risk in these inherently volatile markets. Their strongly cyclical nature also underlines the importance of timing of investment acquisitions. The need for capital markets to be founded on much clearer assessments of risk is one of the key lessons to emerge from the financial crisis and is highly pertinent for investment in IFC office markets."

Key findings from the report include:

London, New York, Hong Kong and Tokyo recorded similar proportionate falls in prime office rental levels from peak to trough, but timing and market drivers differed. London's property market responded most rapidly to the onset of the crisis and has been the first to see rents turning back up.

Different market experiences reflect differences in the economic structures of the four cities. In Tokyo, financial services are less important, less internationally oriented and have a smaller share of the CBD office market than in the other three cities.

Tokyo's office investment market is heavily reliant on domestic investors.

New York was acutely affected because of high dependence on securitised debt, leaving investment activity depressed in 2009. Capital values were most severely affected here with a drop of around 55%.

Leasing Market Trends

Occupational demand for CBD offices was severely hampered in all four cities. London and New York saw a greater and earlier direct impact from contraction of demand in banking in finance compared with Hong Kong and Tokyo. By Q3 2009, a common trend of rental stabilisation was evident.

Hedge funds played a big part in changes to top rental levels in Hong Kong, New York and London.

Investment Market Impacts


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