Double-digit rental growth for London offices in 2010
Date : 02 February 2010
Offices in central London are set to record double-digit rental growth in 2010, according to Knight Frank which today hosted its annual Central London office market breakfast at The Dorchester, London.
Knight Frank forecast a return of expansion-led occupier growth, as London’s internationally-facing economy benefits from an upswing in global trade and financial markets. In addition, the lack of speculative development will result in a sharp fall in availability in the next two years.
Knight Frank also forecast a significant increase in values this year, as the projected rental growth is priced into the market and more institutional property funds look to invest in 2010.
Knight Frank anticipates the rebound in property prices to be sustainable, as activity is consistent with past cycles and there is continued interest in London offices from sovereign wealth funds.
City & West End highlights
· City prime rents are forecast to increase by 19% in 2010 to £52.50 per sq ft (up from £44.00 per sq ft in 2009), due to a shortage of high quality office space and revived tenant demand. Rents are forecast to rise to £67.00 per sq ft by 2014, an increase of 52% over five years
· Supply in the City fell by 9% in the second half of 2009 to 12.2 m sq ft, and a further fall of 12% in 2010 is forecast, taking availability down to 10.7 m sq ft
· 2011 is expected to see just 1.1 m sq ft of speculative new development delivered to the market – average take-up for new and refurbished space is 3.2 m sq ft per annum. This will create intense competition for good quality space
· City prime investment yields are forecast to fall by up to 100 basis points in 2010, as more investment flows into the market, attracted by the prospect of strong rental growth
· Capital values are forecast to increase by 43% in 2010, thanks to a combination of falling yields and rising rents
· West End prime rents are forecast to record growth of 11.5% in 2010 to £72.50 per sq ft (up from £65.00 per sq ft in 2009), due to a limited pipeline of development schemes in core locations. A rise in demand from specialist fund managers, such as hedge funds, is expected this year, following the recent recovery in financial markets
· Availability is projected to fall by 14% in 2010 to 7.6 m sq ft, as renewed economic growth coincides with a 26% drop off in new speculative development completions
· In 2011, a similar ‘supply crunch’ situation appears likely as there is currently only 106,000 sq ft of speculative space under construction for delivery in that year. Average new and refurbished take-up is 1.7 m sq ft per annum
· West End prime investment yields are forecast to fall by another 75 basis points, to 4.25% in 2010, as growing demand is expected to encounter an increasingly limited supply of sellers. Capital values are forecast to increase by 31% this year, as bidding becomes more competitive for prime assets.
James Roberts, head of central London research, Knight Frank said: “Although the situation in the UK economy is fragile and will remain so, I view developments in the global economy and financial markets as more important for the London office market. This is due to the international profile of companies operating here. Many of the largest office occupiers in the capital earn most of their revenues overseas, and I believe recovery for the world economy will lead to increased office demand in 2010.”
Will Beardmore-Gray, head of City leasing, Knight Frank said: “Due to the lack of new development starts across London in the last two years, supply will come sharply under pressure in the next two years. In fact, we are expecting a supply crunch in 2011, as an inadequate development pipeline collides with strong structural demand and tenants expanding in response to a stronger global economy.”
Ker Gilchrist, head of West End Investment, Knight Frank said: “We are not subscribers to the mini-bubble theory, as rental growth is forecast and there are encouraging signs in the occupational market; this is drawing in more investors. Growth is sustainable, thanks in part to growing international buyer interest, particularly from Sovereign Wealth Funds focussing on quality assets and the fact that capital values will rise significantly this year and next. We view this year’s focus as being on development sites and short turn-around refurbishments, due to the constrained development pipeline, and trophy assets as more international fund money focuses on London.”
Ian Marris, head of London residential development, Knight Frank said: "Investors started to identify opportunity in the land market in the spring of 2009. However most were held back by the general moratorium, by lenders, on speculative development finance. This trend remains but ever we are starting to see some potential for easing over the coming months albeit on extremely cautious terms. The mood within the market is generally one of cautious optimism. The market has started to respond to the positive reports filtering out from the end user markets which went through a period of very positive growth in last nine months and ended the year on a relative high having delivered recorded growth of approximately 6% for the year. The star sector in 2009 was the core market however we expect this will be overtaken by the super prime market in 2010. Lack of supply remains an issue and it is the disequilibrium with demand which will push prices upwards in 2010. “
For further information, please contact:
James Roberts, head of central London research, Knight Frank, +44 (0)20 7861 1239
William Beardmore-Gray, head of City leasing, Knight Frank, +44 (0)20 7861 1308
Ker Gilchrist, head of West End investment, Knight Frank, +44(0)20 7861 1748
Ian Marris, head of London residential development, Knight Frank, +44(0)20 7861 5404
Naomi Curtis, commercial PR manager, Knight Frank, +44 (0)20 7861 1744