Supply crunch drives London office rental growth

LONDON: Central London office rents are expected to see strong growth over the next two years, driven by a lack of supply of quality space, according to Knight Frank which hosted its annual Central London office market breakfast at The Dorchester, London on Tuesday, Feb 1.

Knight Frank forecasts increased demand from both lease breaks and expiries and the expansion of business sectors such as specialist financial, TMT (Technology, Media & Telecoms) and renewable energy. Inward investment from Asia-Pacific firms is also expected to generate demand for London office space.

"A similar demand /supply imbalance in the investment market will also drive pricing in the core markets with increasing overseas demand, particularly from the Far East," Knight Frank said while predicting the strongest performance to be from good secondary stock or refurbishment opportunities, with the timing of letting and exit holding the key to maximising value.

Knight Frank head of Central London research James Roberts said: "With the pound sterling low by historic standards, more foreign money will be coming to London and creating jobs. I see Asia-Pacific companies expanding in London in the next few years, as history shows that rising nations in time move from being exporters of manufactured goods to exporters of investment capital. London, with its long-standing ties with locations like Hong Kong and Singapore, is well positioned to become the East's beachhead for branching into Europe."

Knight Frank leasing partner Tim Robinson said: "This cycle is being driven by a lack of supply, and over the next two years, as business expansion appears on the agenda, it is a certainty that the availability of new space will be inadequate to satisfy demand. We expect all core markets to achieve new record headline rental levels."

Knight Frank investment partner Stephen Clifton said: "Central London is the gold bullion of world property markets with strong rental growth driving investment performance. Prime yields will remain under pressure in 2011, however good secondary product and refurbishment projects will be the strongest performers."

City prime rents are forecast to increase by 9.1% in 2011 to £60.00 (RM295) psf (up from £55.00 per sq ft in 2009), as economic growth bolsters occupier sentiment in the second half of the year. Rents are forecast to rise to £67.50 psf by 2012.

City supply fell by 15% in 2010 to 10.4 million sq ft, and a further decline of 5% in 2011 is forecast, taking availability down to 8.8 million sq ft.

2011 is expected to see just 0.85 million sq ft of speculative new development delivered to the market. The average take-up for new & refurbished space is 3.2 million sq ft per annum. "This will create intense competition for good quality space and will tighten supply conditions into 2012," said Knight Frank.

City prime investment yields are forecast to fall by 25 basis points to 5.00% in 2011, as demand from overseas investors strengthens.

West End prime rents which recorded the strongest of levels of growth for a decade in 2010 are forecast to to grow 17.6% in 2011 to £100.00 psf (up from £85.00 per sq ft in 2010 which reflected 30.8% growth for the year), as the market faces supply pressures in Mayfair / St James's and demand from a resurgent hedge fund sector.

Availability in the West End is projected to fall by 7% in 2011 to six million sq ft, as existing new space is transacted and tenants with a business need to relocate focus on good quality second-hand options.

"There is just 209,000 sq ft under construction speculatively in the West End that is due for completion in 2012. Faced with the prospect of continued strong rental growth, tenants with requirements for a 2013 relocation are expected to commit early to pre-lets in those buildings which are under construction and due for delivery that year. Average new and refurbished take-up is 1.7 million sq ft per annum," said Knight Frank.

West End prime investment yields are forecast to remain at 4.00% in 2011, as demand from foreign investors grows, the sterling remains good value and interest rates are low.