The central London office investment market is likely to see a relatively small correction in pricing during the second half 2016 according to research from Avison Young contained within its Central London Office Briefing for Q2 2016.
The report from the world’s fastest-growing commercial real estate services firm suggests that the correction, due some retail funds looking to satisfy redemptions following BREXIT, will not be drastic or long term trend.
Nick Rock, of Avison Young’s Central London office team, said: “In the ultralow interest rate and bond yield environment, UK real estate remains attractive, particularly for overseas investors, particularly those with US dollar and Japanese Yen denominated funds.
“Market fundamentals remain good and we predict that income-focused assets in prime locations will perform the best with investors seeking a flight to safety.”
Avison Young reports that Investment transaction volumes across the UK as a whole totalled £11.5 billion in Q2 2016, 43% lower than in the same period of 2015, but just 12% below the five-year average. The Central London office market also recorded a large fall in trading volumes, down to £2.08 billion, 29% down on the for Q2 2015 and down 22.5% against the five-year average.
The City of London was the best performing part of the Central London market, with £1.43 billion transacted during Q2. This figure was down just 13% against the five-year average. In the West End just £0.43 billion of transactions were recorded in Q2 2016, down 42% against the five-year average.
Investment yields have been resilient considering the uncertainty in the market, with the West End remaining static in Q2 and a very small softening in City yields.
Nick Rock added: “The dramatic fall in trading volume in Q2 2016 was largely down to the considerable uncertainty in the build up to June’s EU referendum. Following the vote to leave the EU, many UK funds downgraded their portfolio unit prices and moved to weekly valuations, allowing them to react more quickly to market movements.”
In the Central London occupier markets, take-up fell significantly during Q2 and reached only 1.91m sq ft in Q2, a fall of over 29% compared to Q1, and the lowest level of activity since Q2 2009.
Avison Young’s report revealed that the performance of the different sub-markets varied markedly, with West End take-up falling by only 2.6%. Supply increased by 4% to 11.2 m sq ft – the first increase in overall supply in over two years. As a result, the Central London vacancy rate increased by 40 basis points (bps) to stand at 4.8%. Notwithstanding the falling take-up and increasing supply, average rents continued to rise across Central London – by 5.7% – to reach £51.88 per sq ft.
This trend of increasing rents was seen across each of the major Central London sub-markets. The development pipeline continued to increase over Q2, with 14.2m sq ft under construction, a 2.6m sq ft increase in potential new space compared to the first quarter of the year.
Take up in the West End fell slightly in Q2 to 625,000 sq ft, 2.6% down compared to Q1. At the same time supply rose by 12% in Q2 to stand at 2.98m sq ft, the first increase in supply since early 2013. This resulted in a 40 bps rise in the vacancy rate to 4.2%, a figure that had fallen to record low levels in the first quarter.
“Despite the increase in vacancies, rental levels in the West End continued to rise in Q2 with average rents rising to £63.00 per sq ft. Mayfair continues to command the highest level of average rents at £75.59 per sq ft, followed by St James’s which broke the £70.00 per sq ft barrier, reaching £71.13 per sq ft,” said Nick Rock.
“At the same time take up in the City fell by 35% over the quarter and reached 739,000 sq ft, compared with an average quarterly take up rate of 1.34m sq ft over the last five years, and was the lowest quarterly level reported since Q1 2009,” he added.
Avison Young’s report reveals that 27% of activity was in fringe city locations with the quarter’s largest letting to WeWork, who signed a 20-year lease agreement at 33 Queen Street.
The report also reveals that overall supply in the City market rose marginally (3.7%) to stand at 4.43m sq ft, but supply in fringe locations fell back slightly. City vacancy rate edged up to 5.4% overall, compared with the peak level of 17% in early 2009. The fall in supply in fringe locations meant that the vacancy rate here fell to record low levels of 5.9%.
Average City rents rose to £53.20 per sq ft – 20% above the five-year average of £44.00 per sq ft. City development pipeline increased by 21% (1.3m sq ft) to stand at 7.62m sq ft.
In the Midtown market leasing activity continued to ease off in Q2, with just 292,000 sq ft of new lettings reported. Supply in Midtown totaled 1.93m sq ft, largely unchanged from the first quarter.
At the same time, vacancy rates remained static at 4.5% overall. Average rents in Midtown rose to £51.43 per sq ft with the highest levels reported in Covent Garden, where average rents are closer to £60.00 per sq ft. There was little change in Q2 in the overall development pipeline, which now stands at 2.2m sq ft.
