Take-up in central London’s commercial property market dipped in the first quarter of 2018 but some sectors performed well and vacancies fell, according to the latest analysis to be published.
Overall, take up reached 2.4 million square feet in the first three months of the year, lower than the quarterly average but ahead of both the equivalent period in 2017 and the 10 year average for the first quarter, which is typically slower.
The report from real estate firm JLL shows that the West End was the strongest performing market, with take-up reaching 932,000 square feet, the strongest first quarter for three years while City leasing volumes were robust at 1.3 million square feet, marginally ahead of the equivalent period in 2017.
East London recorded below average take-up, owing to the absence of any large transactions and reached only 215,000 square feet and pre-leasing was a major feature of the market, accounting for nearly a third of quarterly take-up. This will remain a feature of the market throughout the year with 45% of the 3.5 million square feet currently under offer representing interest in pre-let stock, the report points out.
Vacancy falls in both City and West End Supply across London fell by 4% ending the quarter at 11.2 million square feet compared to 11.7 million square feet at the end of 2017. As a result, the central London vacancy rate fell by 20 basis points to 4.8% and remains lower than the 10 year average of 5.5%.
The West End accounted for a major share of this fall, with supply declining 8% across the quarter, pushing the vacancy rate down from 4.4% to 4.0%. The City saw a modest 2% fall in supply, ending the quarter at 5.4 million square feet, equivalent to a vacancy rate of 4.7%.
However, looking ahead supply could become an issue, the report suggests. Development completions have continued to be quickly absorbed with 70% of quarterly completions pre-leased or let shortly after completion.
‘The low levels of speculative supply being brought to market has kept the new build vacancy rate severely limited at just 0.4% of total stock, less than a third of the 10 year average of 1.3%. This has been a major factor in keeping prime rents unchanged in the first quarter at £110 per square feet in the West End, and £70 per square feet in the City,’ the report says.
The analysis also shows that investment volumes slowed in the first quarter, reaching £2.4 billion. This figure is half that of the strong last quarter of 2017 when turnover topped £4.7 billion, and 30% lower than the 10 year quarterly average of £3.4 billion. Both the City and West End recorded below average quarters, and there were no investment transactions in East London.
‘The market continues to be dominated by strong cross border capital inflows, with 78% of the quarter’s transactions involving overseas buyers, and the UK share only inflated by two major owner occupier sales,’ the report explains.
The level of new build stock currently under construction across central London and deliverable in 2018 stands at 1.4 million square feet, some 0.4 million square feet below the 10 year average of new speculative completions.
‘Newly built stock is expected to become more of a feature in 2019 when 2.7 million square feet of speculative space is likely to be delivered, although around 10% of this space is under offer already. The shortage of new supply is more evident in the West End where the amount of new stock expected to be delivered is below the 10 year average in both 2018 and 2019,’ the report points out.
It adds that there is a healthier development pipeline in the City but it is being delivered in just a few large schemes. ‘This means that not only will occupiers face a limited choice of buildings and locations but also some submarkets will become undersupplied. The evidence suggests that we could potentially face a shortage of new build stock over the next two years as take-up of this kind has been particularly high over the past few years. Continued pre-leasing activity is likely to exacerbate this shortage unless further construction is started on new schemes,’ the report concludes.
