KF: Q2 jitters have not derailed recovery for London offices

 

The General Election and the Euro debt crisis slowed, but did not derail, the recovery in demand for central London offices in the second quarter, according to Knight Frank.

 

The agent’s provisional estimates showed that the office market suffered a marked slowdown in activity in April and early May, corresponding with the general election and growing concerns over Greece’s ability to meet its national debt.

 

However, a recovery in late May and June took take-up in the capital to 2.2m sq ft, up from 1.7m sq ft in Q2 2009.

 

On a quarter-on-quarter comparison, take-up was down markedly on the 4.2m sq ft recorded in Q1, however, Q1 was an exceptionally strong quarter due to a number of large deals buoying the figures.

 

Take-up in Q2 2010 was also below the long-term average of 3m sq ft per quarter – a reminder that the recovery is still at an early stage.

 

There are a number of large deals under offer which should buoy take-up levels later this year, such as Bloomberg at Walbrook Square, EC4 (500,000 sq ft), MF Global at 5 Churchill Place, E14 (100,000 sq ft), and UBS at 4-6 Broadgate, EC2 (700,000 sq ft).

 

Prime rents continued to rise in Q2, up to £50 per sq ft in the City (Q1: £46.50) and £82.50 per sq ft in the West End (Q1: £72.50 per sq ft). This is partly due to a shrinking development pipeline as options for high quality space are diminishing. There is currently only 3.1 m sq ft of speculative space under construction, compared with 9m sq ft two years ago, with the long-term average at 5.3m sq ft.

 

In the office investment market, prime yields hardened further – down 25 basis points to 5.25% in the City and 4.25% in the West End in Q2.

 

William Beardmore-Gray, KF’s head of City leasing, said: “It is encouraging to see the geo-political upsets of April and May did not derail the market, but I think the Q2 figures remind us that the recovery is still at an early stage.

 

“The market will gain a better understanding of where we are later this year, once all the dust from the Euro debt crisis settles, and we find out how well the pipeline stacks up against demand.”

 

Bradley Baker, KF’s head of central London tenant representation, said: “For an occupier it is a balance between making a property decision now when his own business outlook is uncertain, or waiting for calmer times knowing the office market is edging further into the landlord’s favour.”

 

james.buckley@estatesgazette.com