Supply squeeze to fuel strong office rental growth in Central London (UK)

The Central London office market continues its post-credit crunch correction with rents continuing to rise and the highest quarterly take-up recorded for four years, according to the latest research from CB Richard Ellis.

In the first quarter of 2010 the recovery in prime rents continued and although rents in Central London are still four per cent lower than a year ago, on a quarterly basis the Central London prime rent index was six per cent higher. This trend was reflected in prime rents which rose over the quarter to £47.00 per ft² in the City and £85.00 per ft² in the West End.

Central London leasing transaction levels were above average for the second successive quarter. Take-up in the first quarter was 4.4 million ft². The City accounted for 50% of take-up as transaction levels reached a near record 2.2 million ft², while take-up in the West End and the Docklands was above the long-term average.

Digby Flower, Head of Central London Office Agency, CB Richard Ellis, said: "The high level of take up has been fuelled by a combination of pent up demand and good opportunities for tenants looking to take advantage of market conditions. The strong tenant demand produced sharp reductions in supply with the result that the market balance is tipping back towards the landlord, evidenced by the prime rent rise across all markets and the reduction of rent free periods.

"2009 marked the peak of the development cycle resulting in completions declining this year and in 2011, with the consequence of a squeeze on supply, which in turn will continue the upward trend in rents. We are now at the beginning of a new development cycle but the results of this will not be felt for a few years yet."

Q1 2010 highlights:

Take-up rose to 4.4m ft² the highest in nearly three years.
The City accounted for 50% of total take-up as transaction levels reached a near record 2.2 m ft², while take-up in the West End and Docklands was above the long term average
Supply squeeze continued and availability eased to 16.7 m ft² from 18.5 m ft²
Central London vacancy rate reduced to 6.7%
Development pipeline remains limited with only 4.12 m ft² of developments expected to complete in 2010, compared with 6.5 m ft² last year and only 1.30 m ft² of completions scheduled for 2011 which would make it the lowest on record.
Investment transaction totals dipped to £1.2 bn however it was lack of stock that was the primary factor behind the weaker first quarter as strong investor interest pushed yields lower – 5.75% in the City and 4.5% in the West End.

Banks were the driver behind recent city deals accounting for 40% of take-up, significantly higher than the long term average of 29%. New requirements were spurred by acquisitions in the sector and changes to lease structures. Key deals included:

Barclays – 20 Cabot Square, E14: 346,000 ft²
Blackrock – Drapers Gardens, EC2 270,600 ft²
Macquarie – Ropemaker, EC2 212,400 ft²
Pinsent Masons, 30 Crown Place, EC2 181,700 ft²
LOCOG, 10 Upper Bank St, E14 135,300 ft²
Royal College of General Practioners, Eustons Exchange 107,600 ft²
Gazprom, Regents Place 2, NW1 89,400 ft²

Investment levels reached £1.2 bn in Q1 with overseas investors continuing to dominate the market:

Middle East and African investors made up 40% and German investors 12% of all transactions. A lack of stock restricted investment volumes but with more coming on to the market, transaction levels are expected to increase in Q2. The largest deals were – sale of 5 Churchill Place, E14 for £208m; sale of Victoria House, WC1 to M1 Real estate for £175m and HIH German open-ended fund acquiring 100 New Bridge Street, EC4 for £110.3m.

Source: CBRE

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