Raise your head Take-up is edging higher, rents are bottoming out and, on paper, speculative development almost makes sense. Is the London market moving forward? Stacey Meadwell crunches the numbers
“London emerges from downturn”; “at the turning point?”; “rapid shift in sentiment” – these are just a few of the headlines above the raft of reports on the central London market to come out of big property firms’ research teams in recent weeks.
Researchers have been working overtime, poring over the Q3 figures to determine whether the capital’s sick property market is showing signs of recovery.
Following an analysis of three such reports – those produced by Cushman & Wakefield, Knight Frank and Jones Lang LaSalle – what, if any, consensus emerges about central London’s office market performance in Q3, and what do they predict for the early years of the new decade?
Rents in £ per sq ft at end of Q3 and change on previous quarter
Take-up
Q3 take-up as a % increase on Q2
Cushman & Wakefield | 64% | Increase |
|---|---|---|
Jones Lang LaSalle | 56% | Increase |
| Knight Frank | 68% | Increase |
Take-up could hardly have become any worse, but all three firms reported an increase over the previous quarter. Nomura’s letting at Watermark Place, EC4, was the headline-grabbing deal that boosted figures by a welcome 525,000 sq ft.
Indeed, Knight Frank pointed out that just one transaction of more than 50,000 sq ft had been recorded in the City in the first half of the year, while, in Q3, Nomura’s deal was one of four exceeding that size.
However, it is generally accepted that, despite its size, the Watermark Place deal marked a low point in the cycle in setting a new level of incentives.
Landlords UBS and Oxford Properties agreed four years rent free, with the equivalent of nearly another two years in fit-out costs, in exchange for a hefty 20-year commitment from the Japanese bank.
The upward trend in take-up is an encouraging sign, but researchers are keen to point out that the market has a long way yet to go.
JLL’s report says: “While the sharp 56% quarterly increase was undoubtedly welcome, it must be put into a longer-term context: it was 22% below the long-term average. Year-to-date take-up of 4.3m sq ft was 31% below the equivalent period of last year.”
Looking forward, Cushman & Wakefield says that 1m sq ft of new requirements were launched in the month to 5 November. It names Centaur Media, Shell and Mace as having West End requirements that total 326,000 sq ft. In the City, it cites AON and Bird & Bird, with 350,000 sq ft of requirements between them.
According to JLL, there was 1.8m sq ft of space under offer at the end of Q3. It says: “The driver behind take-up in the short to medium terms will mainly be lease events, with additional activity from consolidation and opportunistic occupiers.”
Rents
Rents are a long way from showing signs of rising, say all three reports. But they agree that the market is at or close to the bottom of the cycle.
Knight Frank’s report says City rents have “reached a low point” and, in the West End, it finds rent-free periods unchanged at 24 months on a 10-year term certain.
Terms in the City, according to JLL, have increased slightly to 33 months, assuming 10 years term certain. The firm says that prime locations such as Mayfair will have rental growth tempered by the revaluation of business rates.
C&W predicts that rents will start to increase in the second half of 2010.
This is based on the gradually shrinking availability and sharp break in speculative development starts (see supply below).
There is consensus among the three reports that pressure on landlords to offer bigger incentives will lessen as stock reduces, giving occupiers less choice and, most importantly, reduced bargaining power.
Rents in £ per sq ft at end of Q3 and change on previous quarter
| City | Docklands | West End | ||
|---|---|---|---|---|
| Cushman & Wakefield | 42.50 | – | 75 (stable) | Stayed the same |
| Jones Lang LaSalle | 45 | 37.50 | 75 | Down |
| Knight Frank | 42.50 | c35* | 65 | Down |
*No transactional evidence
Supply
Q3 and change from previous quarter
| Availability (sq ft) | Vacancy (%) | ||
|---|---|---|---|
| Cushman & Wakefield | 20m | 8 | Increase |
| Jones Lang LaSalle | 18.2m | 8.5 | Increase |
| Knight Frank | 24.52m | 11 | Increase |
The screech of developers putting the brakes on new speculative development starts has been almost audible in central London.
All three reports say that the next six months will see the amount of space from speculative development completions reach a peak before falling off substantially.
It is the potential for a longer term shortage that is fuelling confidence that incentives will start to reduce next year.
“The total development pipeline of 4.8m sq ft is unlikely to increase over the short to medium term, and supply levels will diminish quickly from 2011 onwards,” says Knight Frank’s report.
This view is backed by Drivers Jonas’ Crane Survey, which – as the name suggests – monitors development activity. In the six months to the end of the survey, the firm found that the volume of office space under construction dropped by 18% and is 44% below its last peak, in early 2008.
But these figures must be put into context, and the report goes on to say: “Before landlords and developers get too excited, there is still 8.5m sq ft of space under construction, and 5.6m sq ft of this is unlet, so the pipeline is by no means empty.”
Looking ahead, JLL says that, with building costs having fallen, and with rents and yields expected to improve in 2012-13, “the argument for commencing schemes speculatively is strengthening”.
However, the report acknowledges that constraints on speculative bank funding mean that few firms, even if they have the appetite, will actually be in a position to start construction.
