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Gloss falls from London office market as vacancy rate rise

Prime office rentals fell from £65 per square foot at the end of 2007 to £52.50 at the end of 2008, while vacancy rates rose from 9.6% at end the end of September to 11% by the end of December, the report from property agency NB Real Estate said.

The damage was worst in London's prestigious West End, home to the city's once-ubiquitous hedge funds, after the industry's collapse caused rents in the area to plunge 29% to £85 per square foot in 2008, the report also said.

'The boom in the hedge fund sector meant they paid scant regard to the property costs they were taking on,' said James Gillett, NB's director for Central London Markets.

'That mentality and the rental legacy it leaves behind are far removed from the current day post-Madoff situation,' added Gillet, referring to Bernard Madoff, whose alleged $50 billion hedge fund scam has seriously damaged the industry's reputation.

Industry experts claim that the current record rent of £140 per square feet in the West End was agreed by Permal Investment Management Services, a fund of hedge funds, for offices at 12 St James's Square in October 2007.

Rival funds ZBI, GLG and investment house Warburg Pincus are also believed to have agreed rents of about £110 per square feet for office space in the West End.

The NB report also revealed that yields on prime City offices at the end of 2008 are 6.75%, up from 5.5% a year ago. 'This looks increasingly attractive to investors in a low interest rate environment,' it said.

London's West End was ranked the world's most expensive office location by consultants Cushman & Wakefield in February last year, followed by Hong Kong and Tokyo.