The City of London office market is established in a new cycle, with rents rising in the leasing market and prices on the increase for property investment, shows new research from Knight Frank.
Rents on prime office space increased by nearly 5% in Q3 to £57.50 per sq ft, the first time rents have risen since 2010. This has been driven by the resurgence in occupier demand this year, as better economic news has given companies the confidence to push ahead with plans to relocate. We estimate take-up for Q3 has exceeded 2.0 m sq ft, compared to 1.6 m sq ft for Q3 2012 and 25% higher than the long-term quarterly average.
We see full year City take-up reaching 6.8 m sq ft this year, up 18% on 2012.
Commenting on the news, William Beardmore-Gray, head of the Knight Frank City office, said: “Interestingly, the City’s occupier market is becoming less dependent upon financial firms, with more corporate occupiers favouring the square mile. This year has seen firms like Amazon, Royal Mail, Informa, Thomas Cook, Publicis, and London Business School take offices in the City. Also, on the Southbank we have seen firms like News Corporation and Ogilvy & Mather take new offices.”
“With the economy gaining momentum, and the occupier base broadening, I expect rents to continue to rise, and see City prime rents reaching £63.00 per sq ft by the end of 2014.”
In the investment market, City prime yields contracted by 25 basis points to 4.75% in Q3, again the first movement the market has seen since 2010. It is also the first time that prime yields have been under the 5.00% mark since 2007, demonstrating investor confidence in the market outlook.
Stephen Clifton, head of central London offices at Knight Frank, said: “The good news from the leasing market has acted as a catalyst for demand in the investment market, drawing buyers towards properties with upcoming lease expiries. These short income assets offer the investor the opportunity to refurbish the asset and then catch the rising tide for rents. Particularly in districts popular with tech and media firms, this is becoming a popular investment strategy, which is buoying pricing in fringe areas like Shoreditch and Farringdon.”
“There is also good reason to feel confident on the outlook for pricing, as evidence of rising rents so early in an economic cycle, and the expectation that there is more rental growth to come, is certain to draw out more buyers. Indeed more deals are now occurring off-market, a sign of more confidence on the part of buyers. However, the refocus of investors towards capitalising on rental growth will further increase demand for short income assets and development sites.”
James Roberts, head of commercial research at Knight Frank, said: “I believe that the City office market is experiencing changes similar to those already seen in Manhattan’s ‘Downtown’ district. In New York more technology, creative and non-financial firms are taking offices in Downtown, as many of the twenty and thirty-somethings who dominate the workforce live in neighbouring districts, like Tribeca and Brooklyn. This is creating a movement towards employers providing offices that are close-to-home for young workers who want to enjoy a city centre lifestyle. The City of London’s proximity to places like Islington, Hackney and the Southbank, which are popular with young professionals, is drawing more companies Eastwards. This is transforming the City office market, and landlords and investors must adjust to the new era.”
