Today Knight Frank unveiled its latest analysis and forecasts for the central London office market at the Dorchester Hotel. Key points were:
Investment Market
• The central London office market saw its strongest year for investment since 2007, thanks to a record level of purchases by foreign investors.
• Total investment turnover for central London was £13.8 bn in 2012, up from £9.6 bn in 2011, and higher than the ten year average figure of £10.8 bn.
• In 2012, overseas buyers invested £9.6 bn, the highest figure on record, and nearly 70% of total activity. In 2000, overseas buyers accounted for 24% of deals.
• This is the fifth consecutive year that foreign investors have accounted for the majority of investment purchases by volume.
Leasing Market
• Take-up of office space in the leasing market was 9.6 m sq ft in 2012, which was down on 2011 (10.7 m sq ft).
• The vacancy rate (available office space as % of total stock) was 7.2% at the end of 2012, compared to 7.3% at the end of 2011. This is the first time on record that the UK economy has experienced a recession without the central London vacancy rate increasing.
• The West End vacancy rate is now 5.6%, significantly lower than the long-term average of 7.6%.
• The City office market was a bright spot, with take-up increasing to 5.8 m sq ft in 2012, up from 5.5 m sq ft in 2011. The City vacancy rate was 8.4%, down from 8.9% a year earlier.
• The City benefitted from a growing cluster of technology, media and telecoms firms, who acquired 1.2 m sq ft of office space in the 2012. This marks a 25% increase on 2011.
Residential market
• Transaction levels for 2012 hit £18 billion with 11,900 deals contracted at an average price of £1.5 million
• Prime Central London growth for 2012 hit an average of 8.7%. The prime markets of Belgravia and Knightsbridge were the star performers at 15%
• An analysis of all transactions show UK buyers accounted for 58% of purchases. In the new homes environment this figure decreases to 27%
James Roberts, head of commercial research, said: “A lot of people are surprised that the City has seen take-up rise in 2012, because it is associated with the banks, who are known to be cutting staff. However, Clerkenwell, Farringdon and Shoreditch are now firmly established as technology and media districts, and we expect to see this momentum build with the forthcoming 4G roll out. Technology, Media and Telecoms firms were the largest source of demand of office space in City in 2012, accounting for 22% of activity. Also, the insurers who operate in the Lloyds insurance market have been taking more office space, with activity from this industry more than doubling to 878,000 sq ft in 2012.”
Stephen Clifton, investment partner, said: “Foreign buyers dominating the London office investment market has become an established state of affairs. The pound has weakened further in recent weeks, which only increases the logic for overseas investors to buy in London. Also, pricing looks attractive compared to their home markets in many cases. Prime yields on City offices are 5.00%, on West End offices they 4.00%, whereas in Hong Kong they are around 3.00%. In 2012, much of the focus was on the safer assets, but in 2013 I expect to see investors taking on more risk, including looking at development sites in order to ride the global economic recovery.”
Philip Hobley, leasing partner, said: “A difficult year for the global economy pushed down demand for leasing office space, but what is remarkable is that the vacancy rate did not rise, which has happened in all past recessions, and how strong deal terms have been. This is because the lack of speculative development over the past five years has kept market supply under pressure. When the global economy gains traction again, I expect improved demand to rapidly push supply down, resulting in wider rental growth by year end.”
Ian Marris, head of development consultancy, said: “The prime markets enjoyed a strong year despite some adverse economic conditions and political interventions. The fundamentals are positive with London being driven by a strong demand from macro investors.
This said we believe the growth in 2013 will be held back, as investors seek to negotiate hard on pricing. A year of price consolidation will be a good outturn and sets the market in good shape for steady medium term growth of 25% over the next five year period.”
John Snow, head of central London offices, concluded: “London proved in 2012 it deserves its reputation as a resilient property market. In the leasing market, supply is comparatively low, with the vacancy rate at 7.2%, which is below the long run average figure. The investment market remains popular with overseas investors, who are now spending more than double the amount on London offices that they did ten years ago.”
