Central London Update 1st October 2012

Latest figures from Jones Lang LaSalle show the investment market across Central London is still out performing in terms of demand from both UK and overseas money as it continues to remain the number one destination for placing global capital.

The West End has seen a buoyant year with provisional figures for the year to date reaching £4.8bn, compared with £3.7bn at the same point last year. Over the third quarter, Sovereign wealth and overseas institutions have been the most active transacting £425.4m. Looking to Q4, JLL expects to see continued transactional activity together with a healthier pipeline as positive sentiment continues for the next 3-6 months.
In the City, the market continues to remain strong for prime investments with no let up over the Olympics and the traditionally quiet summer period for the investment market. So far this year, £6.5bn has been transacted, over £1.84bn up on the equivalent period last year. On this basis, year-end turnover could reach in excess of £8bn, compared to the 10 year average of £5.9bn. Overseas investment is expected to continue dominating this market with a number of large investments recently exchanged or placed under offer to parties from the Middle East and Far East.
In the West End, year to date leasing volumes have been disappointing, totalling 1.3m sq ft compared with 1.8m sq ft at the equivalent period last year and a long term average of 3.2m sq ft. However, there has been an increase in activity from the TMT, energy and retail sectors which are increasingly focussing on locations and stock that will help them attract and retain key staff. Prime rents are averaging £95 per sq ft, however there are a small number of £100 per sq ft+ transactions being achieved or rumoured to be in negotiations in the Core market. While leasing activity was subdued over the summer/Olympic period, this was not unexpected and we anticipate improvement in demand and take up in Q4 and over the first half of 2013 with a notable increase in live requirements.

In the City market, year to date leasing volumes are ahead of the equivalent period in 2011, with 2.8m sq ft transacted compared with 2.1m sq ft last year. Jones Lang LaSalle’s house view anticipates the full year of take-up to be c.4m sq ft – ahead of last year’s total but still below the long term average of 5.1m sq ft. An increase in larger deals of 50,000 sq ft+ is evident with 10 transactions taking place over the year to date, compared with only two at the equivalent period last year; a further four remain under offer. However, it is still a fragmented market and one that has largely been driven by small ‘churn’ deals. Location continues to be an important factor, particularly in EC3 where the majority of these large transactions are taking place.

The Insurance sector has been active accounting for 14% of total demand with the likes of JLT, Royal & Sun Alliance, Prudential and Gallagher Heath all either under offer or in negotiations and there is good occupier interest in other existing buildings and new developments under construction. Growth from the TMT sector is driving both take-up and demand year to date, accounting for 26% of total take up with c.600,000 sq ft let compared with 460,000 sq ft over the entire of 2011 and a long term average of 11%.

There has been limited activity from the Banking & Finance sector over the past 12-18 months, and given the current economic climate and announcements of job cuts within this sector it is unlikely we will see a bounce back in activity in the medium term. Prime rents are averaging £55 per sq ft, with evidence of £60 per sq ft being achieved at the top end for prime stock. Prime rental levels have been stable for the past six consecutive quarters in the City and while we could see some very modest rental growth in the final few months of 2012, our rental growth predictions anticipate growth to return in 2013 and 2014 as we start to see a further tightening in supply and pent up demand transacted.

Neil Prime, lead director UK office agency at Jones Lang LaSalle, said: “The TMT sector continues to thrive across London. It is increasingly migratory from their traditional heartlands seeking locations and real estate that can not only fit with their business plan but provides the creative environment to retain and attract the best talent.” “The insurance sector continues to be the highlight of the City market which vindicates developers’ decisions to press the button to build in this location. Supply continues to be under control but we believe that demand will come back in the second half of 2013 when we will see a rental bounce as companies are able to move due to increased confidence, expiries/breaks in existing leases and the physical obsolescence of existing stock.”