Central London offices show resilience in Q2 2018

Central London take-up remained robust in Q2 2018, reaching 3.39 m sq ft, which is 7% ahead of the long-term average. In fact, only one H1 in the last ten years has seen a higher volume of leasing activity, which provides a useful reference point to demonstrate just how remarkable this year’s results have been to date.

However, it is worth noting that take-up in Q2 would have totalled 2.75 m sq ft without transactions undertaken by the flexible office sector. The sector accounted for 18% of take-up during the quarter, while the long-term average is 6%.

The surge in flexible office take-up we witnessed across Central London last year has certainly slowed in pace during the first half of 2018. Total space taken by the sector reached 807,914 sq ft in H1, down 15% on H1 2017. We do not anticipate a repeat of last year and estimate total annual take-up from the sector to reach circa 1.20m sq ft in 2018.

The public sector accounted for 23% of take-up during the quarter, inflated by the inclusion of the Chinese Consulate’s owner occupier transaction at Royal Mint Court, EC3, totalling 567,193 sq ft, which was the largest deal of the quarter.

However, it was the financial sector that dominated in H1, accounting for around 24% of take-up, followed by the TMT sector with 22%.

Central London supply remained stable at 15.64 m sq ft over the quarter, which equates to a vacancy rate of 6.9%. While availability in both the City and West End markets reduced marginally, the Docklands told a different story, with levels of supply currently 38% above long-term average levels. This was boosted by 25 Cabot Square, E14, entering the supply figures (199,000 sq ft).

Looking forward at the development pipeline, we believe supply has peaked and will fall over the course of the next twelve months due to the lack of speculative new and refurbished space due to complete in the second half of 2018 and 2019.

Over half of all space that is due for delivery over the next 12 months is already pre-let, leaving 3.20 m sq ft of speculative space, which is equivalent to nine months of average levels of new and refurbished take-up.

Prime headline rents across the majority of submarkets remained stable over the quarter, with the exception of North of Mayfair, King’s Cross, Paddington and Southbank.

Any negativity surrounding Brexit uncertainty will be offset by supply pressures, particularly in some of the submarkets surrounding the traditional cores, where we expect to see some positive growth in headline rents.

Investment turnover reached £4.70 bn in the second quarter; making it the highest quarter for investment since Q1 2017 and 38% ahead of the long-term quarterly average. London’s investment market remained the focus of global capital in H1 2018 – with overseas investors accounting for 84% of total turnover by price.

Far Eastern purchasers were the dominant investor group, accounting for 65% of purchases in H1, with capital from Greater China alone accounting for 38%.

Demand from Greater China has been focussed on large lot sizes, whereas the domestic purchasers have been more active in the sub-£100m lot sizes. Over the first six months of the year, there have been 19 individual purchases of assets in excess of £100m, down 30% on the same period last year.

As we move into the second half of 2018, money from across the globe remains focussed on Central London as a place to invest, and occupier sentiment is positive; since quarter-end Facebook (598,000 sq ft) and Publicis Groupe (211,000 sq ft) have committed to a combined total of circa 809,000 sq ft for their new Central London headquarters. Against a backdrop of political uncertainty, the Central London property market looks resilient.

There is little reason to expect any significant change in the current trends. Money from across the globe remains focussed on Central London as a place to invest, and occupier sentiment is positive.

For more information on any of the points discussed in this article, please contact Victoria Shreeves or Hayley Blackwell