A lack of supply and an upturn in occupier demand for space is set to lead to strong rental growth in London’s West End market as investors focus on assets with development potential, it is claimed.
According to the December 2010 West End Offices Update report from leading chartered surveyors and property consultants Cluttons investors are demonstrating their confidence in the market.
‘Whilst occupier demand continues to improve in the West End, incentives are falling, with rents moving up across most areas as reduced availability becomes increasingly evident. Prime rents are now at £90 per square foot with hedge funds continuing to fuel this end of the occupier market,’ said John Wood, head of Cluttons commercial division.
‘Availability of Grade A space continues to fall and the decline in new supply projected over the medium term will further restrict availability. With many lease expiries due over the next two years and a drop in supply over the same period, the market is likely to continue to favour landlords, with further upward movement of Grade A rents as occupiers fight for quality office space,’ he explained.
‘We forecast rents will average in excess of 8% per annum growth over the next four years. Investment activity in the West End continues to improve. Prime yields have shortened as cash ready funds back major investments in the West End. We forecast a further 50 bps inward yield movement over the next four years,’ he added.
The report shows that West End availability fell by 9% to 339,900 square meters as take up rose by 28% to 141,800 square meters. The vacancy rate fell to 5.9% from 6.5% of stock. It also shows that completions totalled 66,600 square meters, up 141%. Space under construction increased by 19.1% to 133,500 square meters.
Headline rental figures moved up, with the prime rent now at £969 per square meter. The volume of transactions was up 10%, totalling £1.96 billion. While prime yields fell 25 bps to 4.25%.
‘Investment activity increased to its highest level since 2007. This trend may be a reaction to the lack of new space that will be available in the medium term, with few or no projects in the development pipeline,’ said Wood.
But investors remain cautious about Victoria. ‘A perception of a heavy reliance on Government occupiers and worries about the impact of the severe budget cuts means investors remain cautious about Victoria, despite the occupier market being quite diverse in reality,’ he added.