MIDDLE EAST REAL ESTATE FORUM Apprehension is set to remain the central theme throughout London’s occupational office market throughout 2017, as the UK begins its two-year divorce proceedings from the EU, writes Faisal Durrani, head of research at Cluttons.
Overall occupier take-up in London’s office market during Q1 2017 was 2.21m sq ft, 37% down on Q4 2016. Throughout the course of 2017, headline rental values and capital values have remained largely stable with no real change registered; however, this masks the fact that net effective rents continue to dip due to a rising number of lease incentives being offered by landlords.
Clearly occupiers are nervous, but there are those willing to be bold and make decisions. This attitude is more prevalent among non-European firms and has fuelled for instance the hunt for 500,000 sq ft of space in the City this year.
The general nervousness stemming from the impending Brexit negotiations is also driving a rising number of requests for break clauses in 10-year leases for office space in the 5,000 sq ft to 10,000 sq ft bracket. Landlords are keen to minimise void periods, especially as supply levels continue to tick up in pockets of central London, which has nudged the overall vacancy rate to 6.3%.
In the commercial investment market continued weakness in sterling is stoking heightened interest in the capital’s office market, especially for those looking for perceived safe havens to park their capital. In fact the proportion of international investment into London offices rose past 80% at the end of Q1 2017, compared with just under 60% a year earlier.
On the residential side, house prices in prime central London have faced some of the most challenging conditions since the Great Recession of 2008. This is as a result of a struggle to cope with the revised stamp duty charges and the continued uncertainty that has followed in the wake of the Brexit referendum. But conditions appear to stabilising.
While residential capital values continued to recede throughout 2016 and transaction levels slipped to levels not seen since 2012, the final quarter of 2016 appeared to emerge as a relatively stable quarter for the most desirable postcodes in the British capital. Values decreased by a marginal 0.4% on average. This trend has persisted into 2017.
There is no doubt that the shock referendum result accelerated a much anticipated market-wide slowdown. But 10 months on since the decision to leave the EU was taken, we have seen the market experiencing a slightly more normal amount of activity, with buyers and vendors returning after a Brexit-induced hiatus.
