Central London office news 10th May 2013

Jones Lang LaSalle's latest Central London report, released today, finds that 2.5m sq ft of office space was let during Q1 2013, the highest total since the end of 2010. While this was mainly the result of a single deal - the 863,000 sq ft forward sale to Google at King's Cross – the agent says demand appears to be on an upward trajectory.

The amount of space under offer at quarter end stood at 1.9m sq ft, the highest for 18 months, and active requirements, adjusted to take account of the Google deal, rose by 13.6% over the period. The TMT sector remains the most important driver of this demand, accounting for 29% of the total, compared to a historic average of 17%.

Neil Prime, lead director, UK Office Agency at Jones Lang LaSalle said: "While the improved figures for the quarter are skewed by Google's forward purchase, it does seem that the demand and take up for office space is beginning to build. However, given wider economic uncertainties, it is still taking companies longer than usual to make decisions.

But as demand and take up improve occupiers are going to be faced with less choice and will have to increase their velocity in transacting to secure their preferred real estate. Whilst we expect the recovery to be gradual initially, assuming a continued and improving sentiment in the global economy we could see a significant change in the supply/demand dynamics towards the end of this year and through 2014.

"Google's transaction at King's Cross and the other on-going requirements for Amazon, Ogilvy, Saatchi’s and others underline the continued importance of the TMT sector in the Central London market. But importantly we are also seeing increasing demand and activity from the financial services sector, which has been limited in recent times. This will continue to improve overall sentiment particularly in the City." Rising demand and an on-going scarcity of grade A space in central locations have also produced the first rise in West End rents for almost two years from £95 to £97.50 per sq ft. City rents remained static at £57 per sq ft.

Nevertheless supply increased gradually over the quarter, to stand 12.1% higher than the same period during the previous year. Furthermore, construction began on some 1.5m sq ft of space over the three months, including three major schemes in the City and West End. The investment market, in contrast, had a weaker quarter, with the volume of traded stock down 38% on Q4 2012 and down 20% on the same period in 2012. This reflects a lack of supply rather than a weakening in demand, with few high-quality opportunities coming to the market.

Damian Corbett, lead director, central London capital markets at Jones Lang LaSalle said: "The sheer level of activity last year – which was the strongest investment market since the financial crisis, with the third highest volumes on record - has led to a shortage of supply, particularly for larger lot sizes. "Meanwhile, the market has become even more dominated by overseas interests with British buyers accounting for just 23% of purchases over the three-month period.

With no foreseeable let up in global investor demand targeting London there is potential for yields to compress further. We are also witnessing global investors becoming prepared to move up the risk curve to place money into the market. This should benefit the sub-markets outside of the core in both the City and West End.” Prime yields in the City compressed by 25 basis points to 5% for lot sizes sub £40m but remained at 5.25% for lot sizes above £40m, while the West End they were static at 4.25% for lot sizes of £10m-£80m and at 4.50% for over £80m. Jon Neale, head of UK Research at Jones Lang LaSalle concluded:

"The aggressive monetary easing being executed by the Bank of Japan could lead to even lower bond yields globally. This could give property yields space to compress even further over the coming months, particularly as demand for London among investors remains so strong."