Although activity was boosted by Google’s forward purchase of its 800,000 square feet headquarters complex at King’s Cross Central, apart from this transaction leasing activity was relatively weak, says the new central London office report from Knight Frank.
However, the firm of international property consultants believes that market sentiment is relatively healthy and it predicts that leasing activity will improve during the year.
‘There is strong interest in large City units from occupiers from all business sectors, with the exception of banking. There is renewed activity from the specialist financial sector, while galleries and natural resources companies are focused on prime stock in the West End,’ says the report.
Overall availability rose to 17.9 million square meters by the end of the first quarter, reflecting a vacancy rate of 7.8%. The increase was primarily in second hand units coming to the market, the largest of which was the release of space at 10 Upper Bank Street by Clifford Chance.
However, the report says that the central London vacancy rate remains relatively low given the challenging market conditions. There is now almost 7 million square feet less available to lease than in the middle of 2009, six months after the collapse of Lehman Brothers which prompted the global economic downturn.
The data in the report shows that there is now 9 million square feet under construction in central London, more than a third of which is pre-let and investment turnover fell to £2.6 billion in the first quarter, around 30% below the previous quarter’s level.
‘Such is the weight of money currently chasing central London stock, that turnover is becoming less relevant as a measure of investor appetite. Levels of investment purchases are now arguably more influenced by the availability of stock, with quarterly levels rising and falling as product is brought to the market. This dynamic is ensuring that pricing of prime assets remain stable at 4% in the West End and 5% in the City,’ the report explains.
It says that prime yields are unlikely to soften in the near term as there is little incentive for landlords to sell and returns on other asset classes remain historically low.
Once again overseas investors were the most active purchasers, accounting for almost 80% of all transactions. The majority of overseas money was focused on large lot sizes, with the 10 largest sales of the quarter going to foreign buyers. There was also considerable activity from domestic investors, accounting for 30 of the quarter’s 57 purchases.
Take up in the first quarter of the year increased by 54% in the West End to 1.5 million square feet, some 28% above the long term average. The report points out that although the figures represent a 50% increase on the same quarter last year, it must be noted that the deal to Google accounted for more than half the total take up. There has been just three million square feet of take up in the last 12 months, almost 30% below the long term average level.
Availability in the West End rose for the second consecutive quarter, levels increased by 9% to 5.5 million square feet, representing a vacancy rate of 6%, the highest level since the beginning of 2011. Despite the increase in supply, levels are still 18% below the long term average and there is five million square feet less space on the market than there was in 2009.
City take-up was one million square feet in the first quarter of the year, a fall of 45% on the previous quarter and 34% below the 10 year quarterly average figure of 1.6 million square feet.
Letting activity came from a range of business sectors including corporates and professional services. The financial sector activity was negligible, and insurance occupiers continue to be an important component of demand. Overall there were just 11 deals over 20,000 square feet compared to 20 in the fourth quarter of 2012. The report says that with the high number of larger units under offer currently in the City, take up levels should increase in the near term.
In Docklands take up fell from 70,000 square feet in the fourth quarter of 2012 to 30,000 square feet on the first quarter of 2013. The report says that Docklands activity has suffered as a result of down sizing in the banking industry, which historically has been a major source of tenant demand.