Following a subdued Q1, Serviced Office Operators and media tech companies each accounted for 18% of Q2 take-up, outstripping banking and finance and professional services, according to figures compiled by BNP Paribas Real Estate.
Unsurprisingly, the four largest deals from the sector came from leading providers WeWork and The Office Group, however activity from smaller niche operators, including Knotel, Fora and Storey, also increased. This activity also contributed to a 21% increase in sub-5,000 sq ft deals compared to H1 2017, following a lack of activity from SMEs last year.
This also follows a trend of strong occupier activity across central London in Q2 2018 with 3.35m sq ft of deals recorded. This brings the H1 2018 total to 7.06m sq ft, 26% ahead of the same period last year. In Midtown, Q2 take-up reached 0.39m sq ft, 51% ahead of Q1 and 35% ahead of the average, while take-up in the West End is 53% ahead of H1 2017.
Meanwhile strong media tech demand has resulted in City fringe prime rents rising to £67.50/ sq ft in Q2 from £65/sq ft in Q1, which is now on par with core City levels. Additionally, 54% of 2018 developments are already pre-let.
Despite continued uncertainty, occupier sentiment appears to be strengthening with rolling 12 month take-up at 14.1m sq ft, its highest level post-referendum. Furthermore, across central London, current ‘under offer’ figures stand at 3.4m sq ft, up from 3m sq ft in Q1.
That said, tenant supply fell to 3.46m sq ft in Q2, the first quarterly fall since the referendum, equating to a 27% share of total supply. This is particularly prevalent in Southbank, where vacancy levels continue to hover around record low levels at 2.59%.
Looking to central London investment, volumes reached £4.04bn in Q2 2018, representing a significant increase of 72% on Q1. However, the overall H1 2018 volumes stand at £6.39bn, an 18% decrease from H1 last year.
However, strong demand and competition for prime stock is keeping prime yields stable at 4% in the City and 3.5% in the West End.
The strong Q2 figures were due in part to the return of multiple transactions above £100m. The largest was the sale of USB’s headquarters at 5 Broadgate, EC2 for £1.06bn reflecting a net initial yield (NIY) of 3.95% to Hong Kong investor CK Asset Holdings.
The research also found increased demand from investors across other Asia Pacific countries, demonstrating their appetite for large freehold assets with a focus on secure income streams.
Simon Glenn, head of West End Investment, comments: “Looking ahead to the rest of the year, we would anticipate there to be continued investment from Asia Pacific into the capital, as investors continue to be drawn to good yields, lease terms and sizeable transactions. This will also include increased activity from Singapore and South Korea, the beginnings of which we saw in Q2.”
