Office vacancies increase in London but the city remains well placed to recover

The amount of vacant office space in central London has increased by 36.5 per cent in the last 12 months as companies affected by the economic downturn have shed staff, consolidated their property holdings or relocated to alternative locations.

The figures in global property adviser Cushman & Wakefield’s new Central London Business Briefing show that just over 14 million sq ft or 5.72 per cent of office space is now lying vacant across the capital’s main commercial districts of the West End, City and Docklands.  Although the figure is the highest for two years (since March 2007), the commercial property market is well placed to recover on the upturn because developers have been much more cautious in building speculative offices without pre-agreed tenants.  At the height of the recession in 1992, for example, the vacancy rate in Central London stood at 16.2 per cent.

In the City of London and Docklands the supply of office space now stands at 9.2 million sq ft, an increase of 25 per cent in 12 months.  In the West End the increase in supply has been more marked – up  by 70 per cent over the year to stand at 5 million sq ft.

In a bid to attract occupiers, landlords are now in some cases offering rent free periods in excess of two years on office leases of ten years.  In the West End, for example, incentives have tripled in length over the last 12 months.  Rents for grade A prime properties are down by an average of 20 per cent in 12 months to stand at £52.50 sq ft in the City.  They are expected to fall another 14 per cent through 2009 to around £45 sq ft – a level not seen since 2003.  In the West End market, rents on prime offices are down around 23 per cent for the year although there remains a relatively limited supply of space at the top end of the market.

The fall in rents and the availability of space now provide one of the best value opportunities for corporates to locate or relocate to better premises in London and a number of major deals have been agreed in the last quarter of 2008.  These included JP Morgan Chase’s 1.9 million sq ft pre-purchase of Riverside South, Canary Wharf.  This deal took the take-up of office space in City & Docklands to 6.5 million sq ft for 2008.  Stripping out this deal, however, and the annual figure of 4.6 million sq ft is the lowest for five years.  One of the largest deals in the West End market was the 84,000 sq ft letting to Halcrow in Brook Green.  A total of 2.9 million sq ft of space was taken up for the year against a long term average of 3.2 million sq ft.

In both of London’s main office markets, financial services is no longer the most active sector looking for space.  In the City & Docklands, professional services, technology/media/telecoms (TMT) and legal sectors remain relatively active whilst in the West End the manufacturing, TMT and professional services are expected to remain dominant through 2009.

James Young, head of Central London offices, Cushman & Wakefield, said: “2008 has not been a great year for London’s commercial property market to say the least.  The financial downturn has been felt across all of the city’s office markets but we won’t see a return to the massive vacancy rates of the early 1990s.  Although there is new development coming through over the next two years, this is not on the same scale as the last recession.  London will remain a global business and financial hub and the favoured European or global headquarter location for most major corporates, particularly as the weakening of sterling has made it a more cost effective location.  It will be the first western capital to benefit from the expected recovery and occupiers are now in a unique window of opportunity to consolidate their London properties or relocate to better quality premises at value for money prices.”

The weakness in the occupational market and the shortage of finance has also affected the amount of investment in central London offices.  In 2007 £19.7 billion was poured into London commercial property by both UK and international investors making the city Europe’s number one investment destination.  In 2008 that figure slumped to £6.8 billion – a fall of 65 per cent.  £3.4 bn was invested in each of the West End and City & Docklands markets.  In the West End this was a 41 per cent fall on 2007’s total of £5.8 bn and in the City & Docklands it was a fall of 75 per cent from 2007’s £13.6 bn.

Clive Bull, head of Central London investment, Cushman & Wakefield, said: “The final quarter of 2008 saw a total of £219 million transactions completed in the West End market.  This compares with £690 million for the previous quarter and £1.325 billion for the same quarter in 2007.  These figures are significant and clearly reflect a continuing slow down in investment activity in a quarter which traditionally is characterised by a significant amount of end of year activity.  The deals that have been completed include the purchase of 1 Old Bond Street, reflecting a yield of approximately 3.55% and 160 Piccadilly at a yield of approximately 4%.  Private investors, who are using a high proportion of equity despite the continuing lack of debt available, have carried out the majority of the transactions.  Towards the end of the quarter we saw signs of opportunity funds from both the UK and overseas taking a much closer look at the West End market as yields continue to move out.  Just before the end of the year, a French opportunities fund exchanged contracts on 47-48 Grosvenor Street and a private buyer also exchanged on Washington House, 40-41 Conduit Street for a price of £30 million.”

Bill Tyser, head of City investment, Cushman & Wakefield, said: “Investment into the City and Docklands market of around £3.4 billion reflects something in the order of 25% of the turnover achieved in the year ending 2007 and more akin to the level of turnover achieved at the beginning of this decade.  Of this turnover, around one quarter has been transacted by German funds, who, for the time being, have largely drawn back from the market since September.  Investment in the last quarter of the year of £502 million was similar to the third quarter’s total of £554 million although JP Morgan’s £237 million acquisition of Riverside South in Canary Wharf for its own occupation somewhat flatters the Q4 total.

“The positive news is that despite the lack of available credit from banks, yields, especially for short-dated income stream stock, reacted sharply in Q4 2008.  There are a number of properties in this category where yields approaching 10% can be considered and clearly the yield premium to gilts and equities combined with low returns on cash, could produce a more buoyant and active 2009 than we experienced during 2008, so long as the stock is available and the risk for further rent reductions are accounted for.”

Ends

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Chris Bond, UK Media Relations Manager                

Cushman & Wakefield

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Notes to Editors:

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