London office market 3rd January 2014

Letting activity in central London grew by over 50% in 2013, and investment volumes hit £17.9bn to reach the highest level since 2007, Jones Lang LaSalle reports.

Office lettings for 2013 totalled over 10.8m sq ft, up on the 2012 total of 7.2m sq ft. In the City, lettings hit 6.8m sq ft, a level of market activity not achieved since 2006.

Competition for City locations has produced rental growth of 5%, with prime rents now up to £60 per sq ft from £57 at the beginning of 2013.

In the West End, take-up reached over 3.5m sq ft in 2013, a rise of around 40% on the 2012 total of 2.5m sq ft, supported by the re-emergence of activity from banking, finance and energy related businesses. Rents in the West End have grown to £100 per sq ft from £95 per sq ft a year ago. Active requirements remain at a healthy level demonstrating the underlying strength of demand, Jones Lang LaSalle reports.

The latest figures show that investment volumes totalled £17.9bn, up by 16% on last year’s total of £15.4bn, reflecting buoyant demand for London offices. This total has been boosted by a number of very large deals including the recent sale of More London to St Martins and GIC’s acquisition of a 50% stake in Broadgate (each transaction circa £1.7bn). Of this, over £6.3bn has been transacted in the West End and it is likely that the full year total for the West End will set a new record high. Volumes in the City total £10.8bn, with £750m in the Docklands.

Damian Corbett, Head of Central London Office Investment at Jones Lang LaSalle, said: “The final quarter has been very strong, and turnover has exceeded initial expectations after a subdued start to the year. In fact, London remains the most active global city, with deal volumes around 1½ times its nearest competitor New York, followed by Tokyo and Paris.

“A number of very large deals in Q4 including the sale of More London (£1.7bn), St Botolphs (£460m), One Grosvenor Square (£306m) and Waterside (circa £200m) have propelled the overall level of turnover to the highest level since 2007. “Lot sizes in the region of £60-80m have proved particularly attractive to institutional investors, and demand for large lot sizes is growing, particularly from high net worth individuals. We have seen continued interest from foreign buyers, particularly those from the Asia Pacific region, and are also seeing new entrants to the market from all around the world, both institutional and private investors. "

Meanwhile, UK funds have shown great confidence in the West End, and are actively seeking value add and short-dated income opportunities. On the back of increased competition from a diverse range of buyer groups, we are witnessing yield compression and this will continue into 2014.”

Neil Prime, Head of UK Office Agency at Jones Lang LaSalle, said: “This has been a remarkable second half of the year for the Central London leasing market, particularly the City with competition an increasing feature for the best accommodation and buildings.

“The key to this change has been return of confidence allowing occupiers to make positive decisions about their real estate and this has translated into transactional activity. There has been a shift change at the larger end of the spectrum and the pre let market has well and truly returned. As the supply of available new accommodation reduces the focus has moved onto those developments being speculatively built. If these buildings are leased ahead of completion, which in many cases looks the case, the future supply to the market looks increasingly constrained and the case for speculative development is clear and apparent.

"Without a return of speculative development in the City the opportunity for occupiers to secure the new space they will need is significantly reduced particularly in 2015 and in all likelihood 2016, which will benefit those other markets that remain supplied. Another product of this lack of supply will be that the number of re-gears will increase as occupiers have no choice but to remain in their current offices.”

Ben Burston, Head of Office Research at Jones Lang LaSalle, said: “Recent rental growth is consistent with our forecasts earlier in the year and evidence that a tipping point has been reached; we believe that 2014 will see further growth and a reduction in incentives as the market responds to the twin forces of an improving economic backdrop and tight supply.

“The improved performance of the occupier market has buoyed investors and led to yield compression, especially for stock with an element of risk attached with investors much more willing to take this on compared to a year ago. Looking ahead, the weight of capital will maintain the downward pressure on yields despite the recent rise in long term rates, and will support the development of new districts as investors look wider due to intense competition in the central core."