Central London offices: Outperforming expectations despite Brexit uncertainty
In 2018, 52% of deals over 20,000 sq ft contained an element of expansion, cementing London’s robustness in a time of political uncertainty.
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Take-up reached 14.80 m sq ft in 2018, outperforming expectations and the highest annual total since 2014. Take-up was buoyed by 19 transactions over 100,000 sq ft, which is the highest annual total of this size band on record, compared to a long-term average of 12.
TMT was the most dominant sector for the eighth consecutive year, albeit, when broken down into subcategories. It was tech take-up that accounted for 67% of TMT deals in 2018. Take-up from the finance sector accounted for 19% of transactions, followed by flexible offices with 16%.
The start of 2018 showed a slowing in flexible office take-up; however, a strong final quarter saw year-end totals reaching 1.96 m sq ft, which means flexible offices now account for 5.4% of London’s office stock. The continued growth in flexible office space is a sign of London’s dynamism and the vitality of the creative economy.
Last year, we witnessed an increasing number of acquisitions from the pharmaceutical and life sciences sectors, in particular in areas such as White City. We believe London is set to become a centre for scientific R&D and will draw capital from new investors unknown to the market previously. London’s potential continues to grow with new submarkets emerging in Nine Elms, Stratford and White City.
Above: Here East, Queen Elizabeth Olympic Park, Stratford.
Source: Rory Gardiner
Central London supply has been decreasing steadily since the end of 2017. In Q4 2018, supply fell to 14.16 m sq ft, which is 13% below the long-term average and equates to a vacancy rate of 6.2%. There is approximately 17 months of supply across Central London, based on long-term average levels of take-up. While availability across all markets has reduced year-on-year, supply in the City is particularly tight, with levels currently 27% below the long-term average. In addition, the level of new and refurbished space available across London is currently at its lowest level since Q3 2015.
A total of 4.44 m sq ft across 28 schemes completed in 2018, down 25% year-on- year. There is currently 11.08 m sq ft under construction across Central London; however, 49% of this has already secured a pre-let, highlighting the depth of underlying demand. There is 5.61 m sq ft due to complete this year, of which 2.49 m sq ft is available speculatively.
"London is set to become a centre for scientific R&D and will draw capital from new investors unknown to the market previously. London’s potential continues to grow with new submarkets emerging in Nine Elms, Stratford and White City."
_Victoria Shreeves, Central London Research,
Prime headline rents across the majority of submarkets remained stable over the final quarter of 2018, with the exception of Soho and Fitzrovia, which increased to £87.50 per sq ft. Prime West End and City rents have remained stable at £105.00 per sq ft and £70.00 per sq ft, respectively.
Although 2019 presents ongoing political uncertainty around Brexit, international investors were undeterred and London remains by far the biggest global destination for foreign investment in real estate. Last year, Central London office investment attracted more global capital than Manhattan, Paris and Hong Kong.
Investment turnover in 2018 reached £16.30 bn, which although marginally down on 2017, is still 15% ahead of the long-term average. Overseas investors accounted for 83% of turnover, on par with 2017. Greater China was the largest investor by turnover in 2018, accounting for 21% of all transactions (£3.48 bn); however, their share has halved year-on-year, from 43% of turnover (£7.12 bn) in 2017.
Where Greater China has stepped back, other Asian investors, such as South Korea who accounted for 16% of annual turnover and Singapore (9%) have stepped forward. We expect this trend to continue in 2019, as London remains a more attractive destination for South Korean investment than Europe or the United States.
This year we expect to see growing interest in London assets from Japan. We expect London real estate to remain highly attractive to international capital, as the value of the pound and London’s fundamental strengths as a place to do business continue to pull investors in.
Read more in the latest Central London Quarterly Report Q4 2018
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