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Strong year for London office market in 2012 but growth expected to be slower in 2013

otal investment turnover for central London was £13.8 billion in 2012, up from £9.6 billion in 2011, and higher than the 10 year average figure of £10.8 billion, the figures from Knight Frank show.

In 2012, overseas buyers invested £9.6 billion, the highest figure on record, and nearly 70% of total activity. In 2000, overseas buyers accounted for 24% of deals.

This is the fifth consecutive year that foreign investors have accounted for the majority of investment purchases by volume.
Take-up of office space in the leasing market was 9.6 million square feet in 2012, which was down on 2011 when it was 10.7 million square feet.

The vacancy rate, that is available office space as a percentage of total stock, was 7.2% at the end of 2012, compared to 7.3% at the end of 2011. Knight Frank says that this is the first time on record that the UK economy has experienced a recession without the central London vacancy rate increasing.

The report also shows that West End vacancy rate is now 5.6%, significantly lower than the long-term average of 7.6%.
The City office market was a bright spot, with take-up increasing to 5.8 million square feet in 2012, up from 5.5 million square feet in 2011. The City vacancy rate was 8.4%, down from 8.9% a year earlier.

The report points out that the City benefitted from a growing cluster of technology, media and telecoms firms, who acquired 1.2 million square feet of office space in the 2012, a 25% increase on 2011.

‘A lot of people are surprised that the City has seen take-up rise in 2012, because it is associated with the banks, who are known to be cutting staff. However, Clerkenwell, Farringdon and Shoreditch are now firmly established as technology and media districts, and we expect to see this momentum build with the forthcoming 4G roll out,’ said James Roberts, head of commercial research at Knight Frank.

‘Technology, Media and Telecoms firms were the largest source of demand of office space in City in 2012, accounting for 22% of activity. Also, the insurers who operate in the Lloyds insurance market have been taking more office space, with activity from this industry more than doubling to 878,000 square feet in 2012,’ he added.

According to Stephen Clifton, investment partner at Knight Frank, foreign buyers dominating the London office investment market has become an established state of affairs. ‘The pound has weakened further in recent weeks, which only increases the logic for overseas investors to buy in London. Also, pricing looks attractive compared to their home markets in many cases,’ he said.

‘Prime yields on City offices are 5%, on West End offices they 4%, whereas in Hong Kong they are around 3%. In 2012, much of the focus was on the safer assets, but in 2013 I expect to see investors taking on more risk, including looking at development sites in order to ride the global economic recovery,’ he added.

A difficult year for the global economy pushed down demand for leasing office space, Philip Hobley, Knight Frank leasing partner, pointed out. ‘What is remarkable is that the vacancy rate did not rise, which has happened in all past recessions, and how strong deal terms have been. This is because the lack of speculative development over the past five years has kept market supply under pressure,’ he explained.

‘When the global economy gains traction again, I expect improved demand to rapidly push supply down, resulting in wider rental growth by year end,’ he added.

According to Ian Marris, head of development consultancy at Knight Frank, the fundamentals are positive with London being driven by a strong demand from macro investors but he believes that growth in 2013 will be held back as investors seek to negotiate hard on pricing. ‘A year of price consolidation will be a good out turn and sets the market in good shape for steady medium term growth of 25% over the next five year period,’ he said.

Overall London proved in 2012 it deserves its reputation as a resilient property market, said John Snow, head of central London offices at Knight Frank. ‘In the leasing market, supply is comparatively low, with the vacancy rate at 7.2%, which is below the long run average figure. The investment market remains popular with overseas investors, who are now spending more than double the amount on London offices that they did 10 years ago,’ he added.

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