KF forecasts West End rent rises and City falls

  Rents in the City of London are set to fall over the next two years, while the West End will see continued rent rises driven by a lack of supply.   According to Knight Frank, which this morning hosted its annual Central London Office Market breakfast at The Dorchester, London, prime headline rents in the West End core will increase by 5% to £115.50 per sq ft by the end of Q4 2008, and by a further 2% by the end of 2009 to £118 per sq ft (Q4 2007: £110 per sq ft).   However, prime headline rents in the City will stick at £63.50 per sq ft by the end Q4 2008, and decline by 1.5% to £62.50 per sq ft by the end of 2009.   Prime yields in the West End will soften to end Q4 2008 at 5.25% (Q4 2007: 5.00%), while prime yields in the City will soften to end Q4 2008 at 5.75%  (Q4 2007: 5.25%)   The value of completed central London prime new build residential property (£2 to £10m) will increase by 3% to end Q4 2008.   The value of completed central London super prime new build residential property (£10m plus) will increase by 5-8% to end Q4 2008.   James Roberts, head of central London Research, Knight Frank said: “The City has a challenging two years ahead, as the balance of the market is tipping in favour of the tenant.    “But we are not seeing the market flooded with sublet space from banks, as occurred in 2002 and 2003.    “The West End is not showing any signs of vulnerability, as lack of supply is providing insulation against the cooler economic environment.    “Contrary to what people would expect, the fund managers and private banks in Mayfair and St James’s are still taking space.”   Commenting on the office leasing market, John Snow, head of central London, Knight Frank said:  “The City office market in the medium term will be defined by how much potential demand converts back to active.    “In the West End, the eclectic mix of tenants combined with shortages of supply should keep the market in check.  Prime rents in the West End will continue to grow albeit at a marginal rate.”   Guy Napier, head of City, Knight Frank provided his views on the Central London Investment market:  “There has been a succession of gloomy indicators on London offices, but we are predicting a correction not a calamity in 2008.    “We believe that the bad news is now largely priced into the market, and already properties that just three months ago were attracting little interest are seeing increasing activity.  We expect both markets to return to rising capital values during 2009 and beyond, beginning in the West End.” paul.norman@egi.co.uk