Upward rental growth is expected to return to the central London office market in 2010 but it will be patchy and the result of supply shortages rather than a dramatic increase in demand, according to major Middle East and international real estate services firm Asteco.
“Where demand is concerned, the outlook for both London’s gross domestic product (GDP) and financial and business services employment growth is positive, but only just, in 2010,” says the Asteco report published today (20 April 2010) using data supplied by London-based Savills Research.
“This is particularly relevant for the West End office market where demand is closely linked to the health of the domestic economy. In the City of London office market, on the other hand, world GDP growth tends to be a better indicator of demand, meaning that take-up forecasts for the City in 2010 are rather more optimistic than those for the West End.”
The report suggests Central London office development completions will fall to record low levels in 2010-2013 due to lack of development finance. “While part of this gap will be filled by refurbishments that are started this year, it is clear that for larger tenants in the City who are looking for Grade A space, scarcity of suitable buildings is already becoming an issue,” the report adds.
“In the West End, because of the less volatile development pipeline, the scarcity of new stock will start to become a problem next year. However, with the comparatively low current level of vacancy in the core West End submarkets, scarcity of smaller units in the most sought-after locations could well become an issue in the second half of 2010.
“It is very clear that pockets of undersupply of certain types of space are already beginning to emerge. It is in these pockets that rental growth will begin to accelerate earliest, however muted the prospects for demand may be in 2010.
“Upward rental growth is likely to occur first in the City office market, primarily on 100,000 square feet Grade A units where a supply and demand imbalance is already becoming evident. This will wash over into the wider prime market in the City during the second half of 2010.”
In the West End, it is Savills’ forecast that the core Mayfair and St James’s submarket will be the first location to see a recovery in rents, with the vacancy rate beginning to fall by Q2 2010, and headline rental growth being seen thereafter.
For the rest of the West End submarkets, 2011 will be the year of a definitive recovery, driven by the combination of a firmer recovery in the UK economy and falling supply. By late 2011, all of central London’s office markets are likely to be firmly in recovery, delivering average Grade A rental growth of 8% per annum over the period 2010-2013.
Commenting on the report, Dubai-based Richard Angel, Head of International Investment at Asteco, said: “The move away from a flight to security to a flight to growth will continue to make the City office market look like a very attractive location for Middle East investors.
“Savills sees no prospect of a double dip in capital values in the City of London investment market this year. While some non-domestic investors may move on to less expensive markets, this gap will be filled and exceeded by the return of the UK institutions.
“Certainly, there will be some tactical sellers - both those who bought last year or in the middle years of the last boom. There will also be a pick-up in bank-led sales. However, it is Savills’ belief that this will not be a large enough pick-up to lead to oversupply.”
