London Office Market Update – Q3 2019

Stable take-up persists

Businesses appear more concerned about the lack of office space in the market and are committing to new leases at a steady rate; a remarkable outcome given the background political noise. 

Office take-up reached 3.4 million sq ft during Q3, in line with the 10 year average and marginally higher than both Q2 and the same period last year. Active demand levels stand at 10.3 million sq ft, the highest level recorded so far this year. Limited options are driving moves, while pre-letting activity is also showing signs of strengthening, placing occupiers under pressure to commence searches for alternative accommodation far earlier than has been the case historically.

Increasingly footloose occupiers

Regearing is also gaining momentum as the shortage of supply stymies the ability of some occupiers to relocate.

In markets where choice is particularly limited, such as the West End, occupiers are increasingly footloose. This is helping landlords in the City achieve new record rents in some cases. For many West End occupiers, the City still offers ‘good value’.

Rent free periods across London are still holding, at roughly 21-24 months on 10 year leases and at about 32-34 months on 15 year leases. That said, there are some pockets of London, such as Southbank and around Crossrail stations, where an ever tightening vacancy rate has compressed rent free periods to nearer 18-20 months, for 10 year leases.

Requirements from the finance, corporate and professional service sectors continue to account for the bulk of demand in the market, standing at 56%.

Investment turnover recovers

Following a weak Q2, investment turnover volumes partially recovered during the third quarter, falling just short of £2.4 billion, underpinned by a resurgence in interest in London assets, particularly from the overseas cohort. We believe this change in risk perceptions around London has been driven by rising geopolitical tensions elsewhere in the world, most notably Asia and the Middle East, which has made London look like a relatively safer haven once more; arguably more so than it did at the start of 2019 as we approached the original Brexit precipice. That said, with political clarity around Brexit appearing to remain elusive, there are still a large number of overseas buyers that would like to be buying in London, but are not prepared to commit before there is more certainty.

While international investors gather on the sidelines in what appear to be increasing numbers, UK investors have leapt to the top of the leader board for London acquisitions, committing almost £1 billion in Q3, taking the nine month total to £2.6 billion. The home team clearly senses an opportunity to secure London assets in a less competitive field, even though yields in the City have now recovered the 25 basis point outward movement from the start of this year, to stand at 4.25% for 10 year income. 

In the West End, there is a lack of transactional evidence to suggest yields have recovered so they remain at 3.75% this quarter. Despite the compressed yield in the City, London still remains more attractive than many other global gateway locations.