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News Release

London

West End Office Rents Increase for First Time in Three Years

Jones Lang LaSalle’s Q2 Central London Market report


Office rents in London’s West End have increased for the first time in three years according to Jones Lang LaSalle’s Q2 2010 Central London market report.
 
Commenting on the research, Jonathan Evans, Head of West End Agency and Development at Jones Lang LaSalle, said: “We have witnessed a real sea change in the West End over the past couple of months as prime office rents continued to strengthen in the second quarter, up 13% to £85 per sq ft in the West End.  This has been driven by several deals in the limited amount of prime space and given this is the first rental growth we have seen in the West End since Q3 2007, is a positive development for landlords and investors.  Looking forward we expect modest growth over the remainder of the year, ending 2010 with a year end prime rent of £87.50 per sq ft.”
 
Neil Prime, Head of Markets Group at Jones Lang LaSalle, added: “In the City, prime rents continued to improve for the second consecutive quarter, increasing 5% to £50.00 per sq ft and we see the rate of growth for the rest of the year as steady rather than spectacular.  From 2011 until 2013 we are expecting double digit rental growth in the City, driven by supply shortages of prime stock.  Rent-free periods, assuming a 10-year term, remained stable at 27 months. We expect further hardening in 2010 with rent free periods of 24 months by year end.”
 
In London’s West End, there was an increase in take-up from the Banking & Finance sector, which accounted for 26% of total floor space let, compared with just 7% last quarter. Total occupier demand in the West End fell by 11% to 4.2 million sq ft, however, the lowest total since 2004.  Occupier demand is the key downside risk - in the short term - for the central London market but Jones Lang LaSalle’s long standing house view is that the recovery will be supply-led.
 
In terms of existing office supply and the development pipeline, West End supply decreased by 3% over the quarter to 6.2 million sq ft. However, 672,000 sq ft of speculative construction was completed with take-up volumes preventing supply rising.  Overall vacancy rates ended the quarter at 6.9%, with Grade A falling to 3.3%.  Speculative activity fell 15% to 854,000 sq ft, nevertheless, the market has seen the first new starts of the cycle with two schemes totalling 230,600 sq ft going under construction; these included Park House Oxford Street, W1 and 5 Hanover Square, W1.

Investment volumes in the West End totalled £1.9 billion, a 93% increase on Q1 driven by eight deals in lots sizes over £50 million.  The year to date total of £3 billion compares with £830 million at the equivalent period last year and £2 billion in the second half of 2009.  Volumes were dominated by overseas investment into large lots comprising £1.4 billion, 73% of the total.  UK vendors drove 45% of sales compared with 96% over the equivalent period last year activity was driven by UK Property Companies which sold £568 million.
 
In the City, existing supply was broadly unchanged on Q1 with a minor 3% increase to 8.2 million sq ft.  Grade A supply, however, decreased 9% to 3.5 million sq ft.  There were only two existing Grade A units offering over 100,000 sq ft at quarter end, compared with 12 at the equivalent period last year, the peak of the supply market.  Overall vacancy rates ended the quarter at 7.7% with Grade A vacancy declining from 4.0% to 3.4% respectively.  The amount under construction declined to 2.6 million sq ft; 19% below the 10-year average.
 
Investment volumes in the City increased 63% on Q1 to £1 billion.  Volumes were driven by UK property companies who invested £335 million, 32% of the total.  Overseas institutions drove 40% of sales compared with 6% at the equivalent period last year.