A busy January in prime central London
Making sense of the latest trends in property and economics from around the globe
4 minutes to read
Prime office rents
Prime office rents across five of our ten key regional cities recorded growth during 2022 amid growing competition for a shrinking pool of the best quality space. If you go back to the onset of Covid in March 2020, eight out of ten markets have registered an uplift in prime rents.
Those are a couple of the findings of the Knight Frank's 2023 UK Cities Report which illustrates the degree to which development volumes have come under pressure from the rising costs of materials and debt, leaving many of the UK's key markets facing a shortage of prime space. The weighted average vacancy rate for the 10 UK regional cities was 9.8% at year-end, compared to 8.9% at the end of 2021. New and Grade A space represents just 3% of total stock. In some cities, overall vacancy is circa 5% with new and Grade A availability representing less than 1% of total stock.
As we've discussed in recent notes, much of the focus has been on the repricing underway as values adjust to higher interest rates, drawing attention away from robust levels of leasing activity. There were more than 1,100 occupier transactions last year, equivalent to the number agreed in 2019 and 9% above the five year average.
Prime office yields moved out by 50-100bps across the main regional markets during the year as investment volumes fell 20% to £1.74bn. That repricing, plus more stable investment conditions, has set the stage for a recovery in deal volumes this year and perhaps some yield compression, Ashley Hudson, head of Knight Frank's Birmingham office, says in the report.
The new year bounce, continued...
We talked on Friday about the notable turnaround in housing market sentiment during the early weeks of the year. Household views on the current trajectory of house prices rebounded into positive territory following two consecutive contractions.
In prime central London, the third week of 2023 was among the most active for offers accepted that we've seen in January for a decade, according to our latest index. New demand is proving resilient, too. The number of new prospective buyers registering in the first three weeks of the year was 6% higher than in 2020, during the so-called ‘Boris Bounce’ that followed the December 2019 general election. In fact, the only time more new buyers have registered in the equivalent period over the last decade was in 2022.
Many buyers are clearly dusting off plans that were postponed in the wake of the mini-budget. The economic outlook isn't exactly bright, but with evidence mounting that both inflation and mortgage rates have peaked, the early part of 2023 offers a period of relative stability to act.
How long will it last? As Tom Bill notes in the piece linked above, the resilience of prices and sales volumes will be put to the test in the spring when larger numbers of transactions take place and by which time virtually no five-year fixed-rate mortgages below 4% will remain in circulation.
Rental rebalancing, continued...
Various metrics now indicate that supply on the UK lettings market is growing from a low base - see also Friday's note.
The supply of lettings property in prime London postcodes is also now increasing, according to our latest index. Not to the point that it has become a tenants’ market, but more balanced conditions are returning.
Rising mortgage rates and the accompanying downwards pressure on prices means more owners are weighing up their options, which include letting out their property. In the first three weeks of January, the number of new lettings instructions in London was 10% higher than the equivalent period last year, Knight Frank data shows. As supply picks up, more tenants are exploring their options rather than renewing their tenancy agreement, particularly when it involves a rent increase. That, in turn, will increase supply further.
See the piece for more.
The next hike
It's not just the housing market - the latest Lloyds Bank Business Barometer suggests that overall confidence among UK companies increased by five points to 22% this month, moving closer to the long-term average of 28%.
Business confidence has been particularly fickle in recent months. Much will now depend on the tone of the Bank of England on Thursday when it announces its next decision on interest rates. Investors and economists expect the Bank to hike to 4%, according to Bloomberg.
"We think the move will bring the central bank within touching distance of the terminal rate for this hiking cycle, though policymakers will probably refrain from giving a firm signal that borrowing costs are close to peaking," say Dan Hanson and Ana Andrade of Bloomberg Economics.
In other news...
Defra has announced more clarity and a rapid expansion of the English environmental schemes - Mark Topliff runs through the implications. Meanwhile, Andrew Shirley considers two new pieces of rural scientific research.