Savills: What does 2014 hold for Central London? (UK)

At its annual Central London real estate presentation which took place yesterday in conjunction with corporate broker Oriel Securities in London’s West End, Savills made a number of predictions for the capital’s market during 2014. A bounce back in activity from mid-size (15 – 25,000 ft²) office tenants, an increase in leasing activity from banks, falling vacancy rates, fringe markets continuing to outperform and the potential beginnings of a pick-up in development activity were some of the key themes outlined.

According to the international real estate advisor, office take-up in the City and West End totaled 11 million ft² (approx. 1 million m²) in 2013 with a substantial rise in demand for larger units in the 100,000 ft² plus bracket dominating the City market. However, 2014 is set to see a return from the mid-size office occupiers in both the City and West End with the insurance and financial sector, professional and creative / technology sectors accounting for the majority of take-up. Savills expects City and West End vacancy rates to fall to 7.4% and 3.5% respectively this year.

In line with Savills predictions at last year’s presentation, the fringe markets have continued to outperform and mature in terms of popularity with occupiers and rental growth. In particular, the firm expects areas such as Paddington, WC2, Covent Garden and Victoria to see above average rental growth throughout 2014.

Mat Oakley, head of commercial research at Savills, comments: “Average prime office rents in London’s core rose by 20% in 2013 with the City exceeding £64/ft² and the West End over £99/ft². This supply driven rental recovery is expected to be sustained, albeit at a slower pace than previous recoveries and we predict that rental growth will be strongest in the fringe rather than in the core.”

Investors in Central London are also anticipated to have an increased appetite in periphery locations this year as risk aversion continues to attract purchasers to the city. 2013 saw over of £20.56 billion transacted in the Central London commercial property market, according to Savills, with international buyers maintaining a dominant position. Looking forward the firm envisages that those investors who purchased in 2008 – 2010 will be looking to realise profits, which could relieve some of the pressure on the short supply of available stock in the core.

When assessing the prime Central London housing market, Savills revealed that the price growth in these areas is expected to exceed 23% over the next five years, on the assumption that there are no further changes to the taxation of high value property.

Lucian Cook, Head of UK residential research at Savills, says: “A number of risks to the prime London markets, most particularly around the Eurozone default, have receded over the past two years. However, because the taxation of high value property is likely to be a contentious policy issue in the run up to the 2015 general election, a lull in price growth in the period prior to polling day is expected.

As a result, Savills forecasts that prime central London prices will rise by 3% in 2014 before falling by -1% in 2015 with a resumption of strong growth thereafter assuming no further increases in the taxation of high value residential property. By contrast, the predominantly prime domestic markets, most notably southwest London, are showing the strongest price growth. The firm expects that to continue throughout 2014, with 6% growth anticipated. Cook continues: “Across the prime London markets the city’s on-going attraction as a place to live and do business will underpin demand over the longer term.”

A final prediction for both the residential and commercial markets from Savills was the potential for an increase in speculative development activity, which has been distinctly absent across both property spectrums over the last seven years.

Source: Savills

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