Q3 London office news 25th October 2016

Third quarter investment and agency figures from Colliers International reveal that in the first full quarter following the result of the EU referendum, the market remains cautious but highlights that the right stock can still command good returns and occupier demand, when it becomes available.

“Since the beginning of 2016 and in the wake of the outcome of the EU referendum we have seen investors and occupiers alike make a ‘flight to safety’ in the London office market,” said Guy Grantham, Director, Research and Forecasting at Colliers International.

“As such, we are seeing increased re-gearing of leases as landlords seek to retain tenants during this continuing period of uncertainty and this is negatively impacting the churn of stock and occupation levels. 

“However the take-up of new or refurbished stock remains high and rents are broadly holding strong, indicating to the strong underlying health of the market.”

Headline rents are broadly maintaining current levels. In the City, rents on sub 10,000 sq ft units appear to holding firm and headline rents have come in to £72.50 per sq ft after a brief peak at £75 per sq ft.

In the West End, headline rents remained unchanged quarter on quarter and look set to end the year at similar levels.

“Incentive packages have moved out marginally, but the shortage of prime stock is insulating prime rents to a degree. The true test will come with the potential release of ‘grey’ space onto the market in 2017,” explains Paul Smith, Director and Co-Head, London Office Agency at Colliers International.

Vacancy levels have continued to rise and the slowing of office space absorption has been compounded by the anticipated release of second-hand accommodation and protracted deal negotiation timelines.

“Increased re-gearing of leases will potentially weaken demand, but those seeking an upgrade to existing space will still experience challenges in the face of significantly low Grade A vacancy,” adds Smith.

Despite challenging conditions, take-up across London has risen quarter on quarter by a not inconsiderable 34%; but remains 7% below the long term average. In the City, take-up has risen by 8% quarter on quarter, aided by the Wells Fargo deal and a flurry of activity at Derwent’s Whitechapel Building. 

Nevertheless, City quarterly take-up is still 26% below average and a continuation of such a shortfall will only have a further inflationary impact upon vacancy. 

In the West End, pre-letting activity has remained healthy and has doubled quarter on quarter but a lack of deals over 20,000 sq ft has helped to put overall take-up at 30% below the long term trend. Vacancy is also rising faster here than in any other major submarket.

Investment volumes across London in Q3 fell nearly 30% on the previous quarter to just £2.4bn as the combined threefold impact of the uncertain post referendum environment, the summer slowdown and a general shortage of product held down overall numbers.

In the City, the purchaser profile has leant even more heavily towards overseas investors, rising to 76% in the year to date, up from 64% in 2015.

The shortage of investment product is acting as the major drag on deal volumes in the West End with Q2-Q3 volumes combined only just exceeding the Q1 total, although overall numbers are only 12 per cent down on the equivalent period for 2015.

“In light of the political and economic disruption the UK has experienced in 2016, deal turn over in London’s West End has actually held up reasonably well. The sheer weight of global capital, and from the Middle and Far East in particular, remains a driving force for the market and we see this continuing into 2017,” added Rob Hayes, Director and Co-Head London Offices Investment at Colliers International.