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News Release


Central London office market sentiment toughens

In anticipation of a more favourable year - according to Jones Lang LaSalle

Jones Lang LaSalle’s latest Central London office research highlights that 2009 was an exceptional year.  After the first quarter of 2009, the market feared widespread tenant disposals, lengthy voids on new stock, falling demand and rental reductions continuing well beyond 2010. Commentators speculated on a flood of bank distressed product being delivered into a market characterised by cautious investors, no debt and rising yields.
Jones Lang LaSalle’s report shows that the outcome was actually very different. Take-up rose, there were supply shortages for particular product types and tenant demand actually increased – and became more confident. There was also evidence of lease terms hardening and tenant competition returned. The investment market was characterised by a dearth of supply and hungry investors – driving a 150 basis point yield compression for certain lot sizes.
Neil Prime, head of Markets at Jones Lang LaSalle said: “This was a remarkable turnaround that few would have predicted. But 2009 was not a “great year”, it was simply much better than feared: Take-up, whilst improving was below average, overall supply increased but at a slower rate than anticipated and demand, whilst improving, remained lower than 15 months ago and rents in the wider Grade B market continue to be a significant challenge.”
Neil added: “We believe 2010 will bring a continued improvement in the market and risk will be easier to quantify.  It will also be a year of opportunity, particularly for those in a position to build speculatively.”
Commenting on investment, Damian Corbett, director of West End Investment at Jones Lang LaSalle said: “Investment volumes fell on the quarter but the annual outcome of £8 billion was a 12% improvement on 2008.  Prime yields compressed sharply over the quarter, by 50 bps to 4.74% in the West End and by 75 bps to 5.75% in the City.  Such yield movement will limit, but not prevent, further compression over 2010.”
Other key features of Jones Lang LaSalle’s report are as follows:
West End
Occupier Take-Up & Net absorption
Activity increased 70% on the quarter with 905,300 sq ft let. This was 45% higher than Q4 2008. The annual total of 2.2 million sq ft reflected a 32% fall on 2008 and was 37% below the 10-year average.  Net absorption was negative for the sixth consecutive quarter although the rate of contraction slowed to sharply to -15,100 sq ft. Occupied space fell 1.8 million sq ft over 2009.
Total demand saw a slight 2% reduction in Q4 to 6.2 million sq ft. Over 2009 demand increased 25%; the majority of increases occurred during Q2 and Q3. Active demand fell 7% on Q3, while potential demand increased 11%.  Demand was dominated by the Service Industries, particularly Advertising, PR and Publishing, which accounted for 15% of total demand. Active demand from the Banking & Finance sector increased 91% over the year to comprise 23% of active demand.
Supply increased just 2% in comparison with Q3 to 5.7 million sq ft. The annual increase was 63%. Overall vacancy rates ended the quarter at 7.7% with Grade A supply falling slightly to 4.7%.  The volume of supply controlled by occupiers fell 14% to 1.8 million sq ft. This comprised 27% of supply, down from 31% in Q3. The amount of space under construction fell 4% in comparison with Q3 to total 1.3 million sq ft, or 1.5% of stock.
Prime rents were stable at £75.00 per sq ft at year end, reflecting an annual fall of 21% (all of which occurred in the first quarter). Further declines are not anticipated due to the limited supply of prime space and sentiment is strengthening.  Incentives remained constant at 24 months rent-free on a 10-year term. These are expected to move inwards imminently.
£889 million was traded in the final quarter, reflecting a fall of 21% on Q3. Annual investment volumes totalled £2.8 billion, 9% below 2008.  A lack of available prime product combined with continuing strong investor demand resulted in further yield compression. Prime yields for lot sizes under £10 million moved in 50 bps to 4.75%.  Foreign investors have been net buyers of £1.4 billion this year. In particular, due to a lack of available debt, private equity-rich investors have been most active, accounting for close to £1 billion of this net investment. UK Property Companies were net sellers of almost £1.4 billion over 2009.
Occupier Take-Up & Net Absorption
1.7 million sq ft was let in Q4, a 17% increase on Q3. The annual total was 4.5 million sq ft, a 19% increase on 2008 but 20% below the 10-year annual average.  Over 2009, Banking & Finance dominated volumes with 39% of floorspace let – the largest proportion since 1997, and 27% of deals. The Service Industry, driven by Insurance & Pensions, drove 35% of deals.  Net absorption was positive at 453,000 sq ft for the quarter. Occupied stock fell 1.4 million sq ft over 2009.
Occupier demand ended the year at 9.3 million sq ft, a slight reduction over Q4 (-5%) but a 19% annual increase. Active demand increased 7% over the quarter, while potential demand decreased 20%. The increase in active demand was driven by the Banking & Finance sector, which saw a net increase of 366,000 sq ft.  At year end, 1.5 million sq ft was under offer – the most since Q4 2007. Much of this was due to complete in the final weeks of the year, which would have led to long term (10 year) average take-up, but this suggests a strong start to 2010.
Total supply increased 3% over the quarter and 71% over 2009 to end the year at 10.2 million sq ft. This reflected an overall vacancy rate of 9.6% and a Grade A vacancy rate of 5.3%, compared with 5.8% and 3.7% respectively at the end of 2008.  Less than 2.5 million sq ft was under construction speculatively at year end, a 26% reduction on Q3 and a 55% annual decrease. Only 1.2 million sq ft is set to complete speculatively in 2010.  Tenants controlled 2.6 million sq ft of supply at year end – a 1.5% decrease over the quarter and reflecting just 26% of total supply.
Prime rents remained stable at £45.00 per sq ft, reflecting a fall of 23.1% over the year. All of the reduction was witnessed in the first half of the year. Incentives hardened by three months to 30 months rent free on a 10-year lease and we expect incentives to come in further over 2010.  The increasingly tight supply of larger units of prime space will put pressure on rents and we expect a return to rental growth in the next 12 months, with double digit upward growth in 2012 and 2013.
Capital transactions totalled £685 million in the final quarter, a decline on Q3 but almost double the volume of the equivalent period last year. Just over £4 billion was traded in 2009, reflecting an increase of 31% in comparison with 2008. This was 30% below the 10-year average.  Prime yields for lot sizes under £40 million have moved in 75 bps over the quarter to 5.75%. For larger lot sizes prime yields compressed 125 basis points over the quarter to 6.00%.
Take-up in the final quarter reached 255,000 sq ft, more than the first three quarters combined and we expect a strong start to 2010. Public Administration & Institutional activity dominated with 67% of floorspace let, driven by deals to LOCOG and the FSA. The administrators for Lehman Brothers also took 73,300 sq ft. The annual total was 475,000 sq ft, the lowest year since 2003.  Occupier demand increased 4% over the quarter to 1.7 million sq ft. Active demand increased 28% while potential demand fell 16%.  Total available space increased 53% driven by the release of tenant controlled space. Overall vacancy rates ended the quarter at 13%, with Grade A supply at 11.4%.  Prime rents remained at £37.50 per sq ft.  £1.2 billion was traded in the final quarter of the year across six deals. Deals included the HSBC Tower for £772.50 million; 5, Churchill Place for £208 million and 20 Columbus Courtyard for £155 million.
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