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News Release

London

Service Sector Dominates Q3 Central London Office Activity

According to Jones Lang LaSalle research


London, 27th October 2010 – According to Jones Lang LaSalle’s Q3 2010 Central London office research, the Service Sector dominated take up activity in the West End with 42% of floorspace taken across 26 deals.  Jonathan Evans, Head of West End Agency and Development at Jones Lang LaSalle, said: “Activity was notably driven by the Advertising and Publishing subsector accounting for 40% of Service Sector activity and 17% of total take-up.  In terms of demand, the Service Sector accounted for 68% of total demand compared with 53% at the end of 2009.  In fact, the Advertising, PR and Publishing subsectors continue to dominate, accounting for 23% of total demand.”

Jones Lang LaSalle’s research also shows that just under 800,000 sq ft was let in the West End across 55 deals, reflecting a fall of 25% on Q2.  Jonathan continued: “Over the first three quarters of 2010, 154 transactions have taken place, compared with 113 at the equivalent period last year.  20% of space (481,000 sq ft) has been let to the Banking & Finance sector, with the Investment Fund Management subsector accounting for 57%.  Net absorption was positive for the third consecutive quarter at 556,000 sq ft .  Just under 480,000 sq ft, across 23 units, was under offer at the end of the quarter - a 38% reduction on Q2 and 21% behind the 10 year quarterly average.”

Total occupier demand in the West End fell 5% to four million sq ft; the lowest total since 1994.  Active demand fell 11% to 2.3 million sq ft, a reflection of take-up; while potential demand rose 5%.  The conversion rate of demand weakened, declining from 68% to 58%.  Net new demand was 42% below average at 539,000 sq ft. 56% of new requirements registered were driven by lease events.

Within existing West End supply and the development pipeline, total supply decreased 6% in comparison to Q2, comprising 5.8 million sq ft. Grade A supply fell 4% to 2.8 million sq ft, reflecting 48% of total supply.  Overall vacancy rates fell from 6.9% to 6.4%, with Grade A rates decreasing from 3.3% to 3.1%, slightly above the 10 year average of 5.5% and 2.9% respectively.  There were five existing units offering over 100,000 sq ft at quarter end, only two of these units were Grade A (Central Saint Giles, WC1 and 2 Kingdom Street, W2).  There was 823,000 sq ft of speculative space under construction at quarter end, a 4% reduction on last quarter and 63% behind the 10 year annual average.

West End prime office rents increased for the second consecutive quarter, by 3% to £87.50 per sq ft. The year to date growth has now been 16.7%. Rent-free periods, assuming a 10 year term, remained stable at 18 months.  Prime net effective rents have increased 24% this year.

West End investment volumes decreased 57% over Q3 with £864 million transacted across 34 deals, however Q2 saw high volumes of activity with the Q3 outcome consistent with activity over the last 18 months.  Year to date volumes of £3.9 billion were 98% ahead of the equivalent period last year, and 48% ahead of the first three quarters in 2008.
 
Jones Lang LaSalle highlights that over the quarter, volumes were dominated by overseas investment into lot sizes over £50 million, comprising £226 million, 26% of the total; over the year to date, there have been 16 deals in lots sizes over £50 million compared with 11 at the equivalent period last year.  Prime yields for sub £10 million lots compressed 25 basis points to 4.00%; this is the lowest level since September 2007. Yields for larger lot sizes have been stable all year at 5.00%.  UK vendors drove 48% of sales compared with 90% over the equivalent period last year; Activity continued to be dominated by overseas privates with investment of £337 million.

In the City, office take-up activity increased 100% in comparison with Q2 with 1.8 million sq ft let.  Dan Burn, Head of City Agency at Jones Lang LaSalle, said: “Volumes were dominated by the 700,000 sq ft pre-let at 6 Broadgate, EC2 to UBS which was the largest single deal in the City since 2002.  This year’s to date total of 4.7 million is 75% ahead of the equivalent period last year and only 13% behind the 10 year annual average.  Over the first three quarters of 2010, 194 transactions took place, compared with 143 at the equivalent period last year; this is the highest amount since 2007.  Robust take-up and stable supply led to net absorption of 1.8 million sq ft.”
Dan continued; “City occupier demand decreased 2% to end Q3 at 7.9 million sq ft and active demand decreased 13% as seven large requirements were converted to take-up.  The conversion rate of demand to take-up was slightly slower than last quarter at 66%, however this was still above average. Potential demand increased 17% as seven requirements totalling 990,000 sq ft came to the market; three of these were from the Banking & Finance sector seeking in excess of 100,000 sq ft .  Overall demand is 20% down on the equivalent period last year and still remains 20% below the 10-year average.
 
Total supply decreased 2% over the quarter to 8 million sq ft . Overall vacancy rates declined from 7.7% to 7.5% while Grade A vacancy rates remained at 3.4%.  Just over 1.9 million sq ft was under construction speculatively at the end of September, a 24% reduction on last quarter and 40% behind the equivalent period last year. Although 1.6 million sq ft of office space completed over the quarter, only 512,000 sq ft remains available.

Dan added: “Prime City rents strengthened for the third consecutive quarter, increasing 5% to £52.50 per sq ft and the year so far has seen 17% growth.  Rent-free periods, assuming a 10-year term, reduced to 24 months from 27 months reflecting net effective growth of 8%.  We expect modest rental growth over the remainder of 2010 to continue with a year end prime rent of at least £55.00 per sq ft.”

Jones Lang LaSalle’s research also highlights that City investment volumes totalled £1.6 billion, a 54% increase on Q2 driven by six deals in lot sizes over £50 million.  The year to date total of £3.3 billion compares with £3.4 billion at the equivalent period last year and £2.7 billion over the first three quarters of 2008.  Volumes were driven by overseas investors who invested £1.2 billion.  UK vendors drove 28% of sales compared with 93% over the equivalent period last year; sales were dominated by foreign institutions and privates with £485 million and £681 million worth of disposals respectively.