Positive Signs for London Markets Amid Continued Slowdown in New Development

Posted on 14 October, 2011 by MOVEHUT

Commercial property in London continues to outperform the rest of the UK commercial property market, particularly in the offices sector, according to new research.

construction underway

CB Richard Ellis (CBRE)’s UK Monthly Index, in which the commercial property advisers track performance across three commercial property sectors, office, retail and industrial, shows an overall increase in UK commercial property values.

A growth figure of 0.6% was registered during September, compared with 0.5% in August. Breaking the commercial property analysis down further, special praise is reserved for Central London and Midtown offices, each posting 1.0% and 1.8% of growth in September.

A trip to the Outer London/M25 commercial property markets brought less positive news. After a solid two years of positive returns from commercial property in this region it recorded a 0.2% fall in returns last month.

Commercial property rental values took a stumble, down 0.1%. These are reported as being “marginally down over the year”.

The “enduring strength of core London markets remains a feature” of the commercial property statistics, says CBRE, noting “a distinct divergence between property types, with good quality asset values growing, offsetting fails in lower grade property”. The price of commercial property in London continues to rise due to the “limited stock of good quality assets”.

Residential and commercial property specialists Savills highlights the lack of development in September’s Commercial Development Activity report.

Commercial property development is found to have fallen at its “sharpest rate in 11 months”. Approximately 29% of commercial property developers saw a fall in overall activity in August, compared to an observed rise in just 17% of commercial property developers.

This led to “deterioration in confidence for a third consecutive survey period”, according to Savills, qualifying this by adding “the degree of pessimism was only marginal”. Reasons for the negative outlook of some commercial property developers included “uncertainty over the stability of economic conditions and continued concerns regarding the level of bank lending”.

Development of commercial property in London increased during August; however, outside of London, specifically in the South East and the rest of the UK markets, there was a contraction in commercial property development.

In Savills’ Central London Office Review and Outlook, “a longer, more gentle recovery in prime rents than has been seen in previous recoveries” is forecast.

While Central London offices take-up slowed over the first half of 2011, the vacancy rate of commercial property in the sector continued to fall, landing at 6.4% by the end of the period.

Echoing CBRE’s findings on the shortage of commercial property in the Central London offices market, Savills says “shortages of Grade A space are continuing to push headline rents upwards”, a trend expected “to continue over the next five years”. Investor demand for Central London offices “remains strong, but is more selective than in the past two or three years”.

A lack of large-scale commercial property take-up in London meant 98% of deals were for buildings where floor space was under 50,000 sq ft. Savills predicts that this below-average pattern will continue in London throughout the second half of 2011, citing the UK economy’s health as “still playing a major role in occupiers’ property decisions”.

The West End of London is “characterised by a lack of supply, strong investor confidence and good evidence”. There were many large commercial property transactions in London; eight deals of above £100m were completed, including one of £452m in Regent Street.

Prime West End yields are described as having “plateaued for nine months”, symbolising “a more benign, selective and rational market”.

The research shows buyers of commercial property in London predominantly hail from the Middle East and Asia regions, mainland Europe and the UK. Domestic commercial property purchasing has seen resurgence in 2011, with British commercial property buyers responsible for 53% of West End acquisitions, compared to 2009 and 2010’s total of 35%.

Savills draws attention to the West End often attracting “inward investment during periods of economic and market volatility in the rest of the world”. Anticipating economic problems in the US and Eurozone regions through the remainder of the year, a prediction of “a pick-up in non-domestic investor interest in the West End over the rest of the year” is given.

Take-up for the City commercial property market “dropped sharply during the first half of 2011 after an exceptionally strong 2010”, although Savills attributes this to a reduction in large-scale commercial property deals. Over 80% of commercial property deals were under 10,000 sq ft, while an upturn in second-hand lettings indicated a rise in “the smaller, cost-conscious occupier”.

Expect an increase in London pre-letting activity, is the message. Forthcoming commercial property lease expiries and a lack of company expansion will be the catalyst, together with “an exceedingly constrained development pipeline” for commercial property in London. Future rental growth will be another feature of London commercial property markets in the City, advises Savills.

Commercial property investment in the City market totalled £3bn, “making it the strongest first half of the year since 2007”, labelled “impressive, given the relative lack of stock that has been brought to market over the last six months”. The outlook is for investor yields to “remain fairly stable over the next six months”.

Over in the Docklands’ commercial property market, low levels of take-up are depicted as a “shocking turnaround since the spectacular figures seen in 2010”. Uncertainty in the London and world financial markets is mentioned, together with a reminder that the Docklands market often mirrors the City of London commercial property market.

Looking ahead, economic prospects for London are said to be “pretty strong, with the inner London economy projected to grow by 4% per annum over the period 2012–2020”. Office-based employment in London is regarded as similarly robust. New development activity in London is set to be augmented by a jump in commercial property refurbishment, with Savills estimating 4m sq ft of refurbished commercial property will be delivered to London by 2014.




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