The central London office market has shown remarkable resilience in the aftermath of political uncertainty surrounding the decision to leave the EU and the start of Brexit negotiations, according to the latest analysis.
After the result of the EU referendum, it would have been unsurprising to have seen a significant drop in demand from both occupiers and investors as uncertainty over the future of the UK’s future deal with the EU dominated headlines, says the commercial property report from real estate firm Knight Frank.
However, office take-up is stable at long term average levels, supply has most likely peaked, and yields remain stable in the 12 months to the end of the second quarter of 2017, the report points out.
It shows there was 3.2 million square feet of take-up in central London in the second quarter of the year, taking the total for the first six months of 2017 to 6.3 million square feet, around 16% above the corresponding figure for the previous year, before the UK voted to leave the EU.
Once again the technology, media and telecoms (TMT) sector was the most active, accounting for 30% of all take-up. However, the business to business sector, including serviced/flexible offices, came a close second, accounting for 27% of leasing activity.
The report explains that sustained demand, along with a shrinking development pipeline, that has helped keep supply levels in check. Central London availability remained stable at 16.2 million square feet, just marginally below the long term average level.
Central London investment stock remained in demand, with pricing stable at 4.25% and 3.50% in the City and West End markets respectively. Investment turnover fell during by 24% during the quarter to £3.59 billion, although this remains above the long term average.
‘As has been the case now for some time, turnover was largely dependent upon stock availability, which we expect to increase over the course of the year as landlords look to capitalise on current levels of investment demand,’ the report says.
‘As we move through the summer, there is little reason to expect any significant change in the current trends; occupier sentiment remains cautious, although not negative, and money from across the globe remains focused on London as a place to invest. Against a backdrop of political uncertainty, the Central London property market looks resolutely stable,’ it concludes.
Meanwhile, the latest commercial report from the Royal Institution of Chartered Surveyors (RICS) shows that occupier demand was broadly flat during the second quarter of 2017, following only modest increases in each of the last three quarters. In fact, the national demand net balance of -2% marked the weakest reading since 2012.
The breakdown shows a disparity between the sectors with demand for offices and retail space falling, offset by reasonable growth net balance of +18% in demand for industrial property. However, the pace of growth for industrial space has moderated, compared to the previous three quarters.
Near term rent expectations display a similarly mixed picture. While the outlook for industrial space remains firm with 29% more respondents expecting to see a rise in rents, a slightly softer trend is expected for offices and the retail sector.
Some respondents continue attribute the drop in demand for retail space to the rise in online shopping over recent years. Significantly, the amount of available retail space rose for a second straight quarter.
A greater shift towards online shopping is supporting the demand in the industrial segment, with respondents noting a squeeze in the supply for leasable space in this area, a prevalent trend since 2012.
Anecdotally, political uncertainty is cited as a factor weighing on occupier and investor decisions, with hesitancy now extending to some areas beyond London. Respondents cited Brexit negotiations and the general election resulting in a Hung Parliament as clouding the outlook for commercial real estate.
Looking ahead, the less buoyant trend in tenant demand has yet to meaningfully impact on longer term rental projections where prime assets look likely to continue to deliver stronger rental performance.
‘The commercial property market has enjoyed a good run and it’s hardly surprising that we are now seeing a flatter trend emerge in the responses to the survey which chimes both with recent economic news flow and the political environment,’ said Simon Rubinsohn, RICS chief economist.
‘That said, the underlying picture remains fairly resilient which is highlighted by the fact that medium term rent expectations are still holding up particularly for prime space. The key issue for the market remains the interest rate outlook and despite some mixed comments from policy officials in recent weeks, it’s hard to see a material shift in the Bank of England’s approach anytime soon,’ he added.
