OCCUPIER ACTIVITY WEAKENS 

For a second consecutive quarter we have recorded subdued levels of market activity in the West End. Take-up reached 1.1 million sq ft, 17% below the level recorded in Q1 and the lowest level since 2016. The slowdown in part can be attributed to the tightness of supply, especially for larger lot sizes. This is manifesting itself in the form of heightened competition for larger units in excess of 20,000 sq ft. At the other end of the market, for units below 2-5,000 sq ft, the number of properties on the market remains high. 

As we have previously reported, 42% of properties in the West End fall in the sub 5,000 sq ft bracket, making it the most significant component of the market. And in order to differentiate themselves and drive more rapid lets, landlords are having to offer more than just CAT A space. Plug-and-play space is one way in which this is being achieved. Furthermore, some landlords, are going a step further by offering greater flexibility on lease terms, such as break clauses at year five on 10-year leases. 

Structural changes in the market, supported by the rise of flexible office space and political uncertainty are together driving this behavioural shift amongst landlords. 

TMT STILL DOMINATING 

The TMT sector remained the most active, accounting for 30% of the market share, followed by financial services (19%) and public sector entities (14%). G-Research was responsible for the largest letting in Q2, taking 102,500 sq ft at Soho Place, W1. With the war for talent ratcheting up, against a backdrop of record job vacancy levels and the average tenure of a tech industry worker standing at about 18 months, it comes as no surprise to see tech businesses targeting space in what are perceived to be the most prestigious parts of the city. 

Increasingly, as office space is seen as a window to the culture of a business and as the tech sector continues to expand rapidly, not just in London, but globally, we expect this sector to remain especially active. 

LOWER GENUINE NEW DEMAND 

Despite the slowdown in take up, named active demand is currently 77% ahead of the long-term average. The corporate sector (33%) is the most active in our demand profile, followed by financial services (29%) and the TMT sector (19%). 

That said, occupiers who are looking for sizeable units remain under pressure and are launching their search for options well in advance of lease events. What this means in practice is that occupiers are remaining on the demand schedule for longer, implying lower levels of genuine new demand. 

SUPPLY REMAINS RESTRICTED 

While demand has weakened, supply has also diminished in parallel, with availability levels dropping by 11% to 4.4 million sq ft, leaving them at the lowest since Q4 2015 and 19% below the long-term average. This has helped to drive down the vacancy rate to 5.1%, against a long term average of 6.2%. In addition, prime headline rents have crept up in parallel to £107 psf, driven by the supply dearth. 

As an illustration of the tightness of supply, there are currently 14 active requirements over 50,000 sq ft that are focused on the West End; however there are just eight buildings that can accommodate these. Looking forward at the development pipeline, there is 4.75 million sq ft under construction in the West End, 68% of which is already committed. 

Furthermore, 45% of the 1.7 million sq ft under construction and due to complete in the next 12 months is already committed. This leaves just 937,000 sq ft of speculative space coming through, which equates to just under seven months of supply, assuming average levels of new and refurbished take-up. 

"The investment slowdown has been in large part blamed on the uncertainty surrounding Brexit as investors take a wait and see approach"

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INVESTMENT DENTED BY POLITICAL UNCERTAINTY 

Investment turnover in Q2 totalled £700 million, down 68% quarter-on-quarter and approximately half the long-term average. There were 14 transactions during the quarter, the largest of which was the acquisition of Waterside House in Paddington. 

The slowdown has been in large part blamed on the uncertainty surrounding Brexit as investors take a wait and see approach. In addition to this, a lack of stock on the market also appears to be exacerbating conditions. Divergent expectations from vendors, who appear unprepared to reflect the current uncertainty in their pricing and investors, who are on the hunt for discounts, means that transaction levels are likely to remain subdued.

Prime yields remain steady at 3.75%. Combined with West End core cumulative rental growth forecasts of nearly 13% through to the end of 2023, the West End appears more attract.