London landlords are being forced to give away between 12 and 16 months of rent to attract tenants to even the most prime offices in the capital as the future of working practices remains in limbo.
Data from Carter Jonas, which looks at the impact of rent-free periods and incentives on real rents in the capital, has found grade-A office rents across central London have fallen by an average of 8% over the 12-month period to Q2 2021.
This compares with a 5.2% increase in net effective rents in the 12-month period ended Q2 2020.
Carter Jonas found that while headline rents across London may have only dipped by 1% this year, the expansion of rent-free periods by three to five months over a five- to 10-year lease had effectively wiped thousands of pounds off landlords’ rental income. Net effective rents are now the lowest they have been in three years.
Typical rent-free periods are now 12 to 16 months on five-year leases and 25 to 29 months on 10-year terms.
In Canary Wharf, E14, the impact of rent frees has seen rents fall from £41.13 per sq ft in 2020 to £38.50 per sq ft this year. In Bank, EC2, rents have fallen from £57.75 per sq ft to £53.67, while in Mayfair, W1, and St James’s, SW1, some 11.1% has been wiped off rental values with net effective rents down to £84.33 per sq ft from almost £95 per sq ft.
Michael Pain, head of London tenant representation at Carter Jonas, said: “Changing market conditions are often reflected in the prevailing level of rent-free incentives well before any movements in headline rents, particularly when demand and take-up are declining.
“Since the Covid crisis began, net effective rents in central London have fallen noticeably, driven by longer rent-free period incentives rather than lower headline rents.”
Carter Jonas said it expected net effective rents to continue to fall despite the gradual return in occupier confidence to the market.
“While the increase in take-up is encouraging, it is unlikely to prevent a further fall in net effective rents, and we expect occupier demand to remain subdued until there is greater certainty over future working patterns,” said head of research Daniel Francis. “Vacancy rates are likely to rise further, especially for second-hand poorer quality stock, in tandem with reductions in advertised rents.”
He added: “Higher-quality stock will not be immune from the downward pressure on rents, particularly as occupiers shrink their occupied estates and seek to sublet the surplus that cannot be disposed of through lease breaks or expiries. As vacancy rises and as landlords increasingly need to compete with tenant-marketed space, advertised rents are expected to decline as competition hots up for footloose tenants.”
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