For the first time in history London’s vacancy rate did not increase during a recession, according to Knight Frank’s analysis of the capital’s property market in 2012.
Vacancy rates across the capital edged down to 7.2% by the end of 2012, compared to 7.3% in December 2011, despite the fall in UK GDP in the first half of the year.
It is the first time on record that vacancy rates have not increased in a year with two consecutive quarters of GDP reduction.
Knight Frank leasing partner Philip Hobley said: “A difficult year for the global economy pushed down demand for leasing office space, but what is remarkable is that the vacancy rate did not rise, which has happened in all past recessions, and how strong deal terms have been.
“This is because the lack of speculative development over the past five years has kept market supply under pressure. When the global economy gains traction again, I expect improved demand to rapidly push supply down, resulting in wider rental growth by year end.”
The comparatively resilient occupancy market helped boost investment levels to their highest level since 2007, with £13.8bn invested in 2012, up from £9.6bn the previous year.
Knight Frank’s figures showed foreign investors accounting for the lion’s share of turnover for the fifth consecutive year, with non UK parties responsible for 70% of activity.
Investment partner Stephen Clifton said: “Foreign buyers dominating the London office investment market has become an established state of affairs. The pound has weakened further in recent weeks, which only increases the logic for overseas investors to buy in London.
“Also, pricing looks attractive compared to their home markets in many cases. Prime yields on City offices are 5%, on West End offices they 4%, whereas in Hong Kong they are around 3.00%. In 2012, much of the focus was on the safer assets, but in 2013 I expect to see investors taking on more risk, including looking at development sites in order to ride the global economic recovery.”
Investment activity surged despite a lacklustre leasing market in which take up was well below the 2011 figure of 10.7m sq ft at just 9.6m.
The City outperformed other submarkets with take up increasing from 5.5m in 2011 to 5.8m last year.
The City vacancy rate was 8.4%, down from 8.9% a year earlier.
Its performance was built on a growing cluster of TMT firms which acuired1.2m sq ft of office space in 2012, 25% up on 2011, according to Knight Frank.
The West End vacancy rate of 5.6% remains well below the long-term average of 7.6%.
Head of commercial research James Roberts said: “A lot of people are surprised that the City has seen take-up rise in 2012, because it is associated with the banks, who are known to be cutting staff. However, Clerkenwell, Farringdon and Shoreditch are now firmly established as technology and media districts, and we expect to see this momentum build with the forthcoming 4G roll out.
“Technology, Media and Telecoms firms were the largest source of demand of office space in City in 2012, accounting for 22% of activity. Also, the insurers who operate in the Lloyds insurance market have been taking more office space, with activity from this industry more than doubling to 878,000 sq ft in 2012.”
Looking ahead for 2013, Knight Frank head of development consultancy Ian Marris said growth would likely be held back as investors seek to negotiate hard on pricing.
“A year of price consolidation will be a good outturn and sets the market in good shape for steady medium term growth of 25% over the next five-year period,” he said.
In the residential market transaction levels hit £18bn at an average price of £1.5m.
Prime Central London growth hit 8.7% with Belgravia and Knightsbridge the top performers with 15% growth.
Across the whole of central London UK buyers accounted for just 58% of purchases, dropping to 27% when only new homes are included.
Jack.Sidders@estatesgazette.com