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News Release

London

Increased demand in Central London office market as City letting activity hits three year high

Supply set to increase for both occupiers and investors in second half of year says Jones Lang LaSalle


London, 24th June 2013   Research released today by Jones Lang LaSalle provides further evidence that the recovery in the Capital is gaining momentum and that London-based businesses are gearing up for growth. Over the first two months of quarter 2  (Q2) 2013 some 1.5 million sq ft of office space was let across Central London, with May recording the highest level of activity in the City since July 2010, a 135% increase on the same month in 2012.

Pre-lets, both prior to and during construction, have grown in popularity this year, particularly in the City, with tenants committing to 868,700 sq ft of new developments since the start of the year, a trend which looks set to continue.
Increased letting activity in the West End has seen smaller units, of less than 10,000 sq ft achieve rents of over £100 per sq ft, such as 23 Savile Row where £105 per sq ft was achieved. Lease flexibility, in particular offering tenants a lease break, usually of five years, proved to be a key factor in securing premium rent occupiers.

With demand for high quality accommodation increasing, prime rents north of Oxford Street are increasingly comparable to those in the supply-constrained core, with 10 Portman Street and 95 Wigmore Street achieving in excess of £90 per sq ft.

Neil Prime, lead director – UK Office Agency at Jones Lang LaSalle, said: “As occupiers become more confident in their view of the economy, the increase in demand continues to gather some momentum. On the whole, this improved sentiment is translating into greater activity, with the number of pre-lets in place a testament to this.

“The rise in demand for Central London offices will create increasing shortages of high quality accommodation. This is beginning to create push factors, particularly from the West End core, and occupiers are now forced to look to other locations, where the quality of the product and pricing are more in keeping with their business needs. This will continue to benefit Victoria, Southbank, NOHO and the City and fringes.

“As we move into the second half of the year, we expect to see a further pick-up in demand as a number of large occupiers, who have been in the market for some time, will look to secure space before availability begins to dry up or follow the pre-let route to satisfy their future requirements.”

The investment market continued to be faced with tight supply, with the value of West End transactions expected to total £1.95 billion for the first half of the year, 26% lower than in the first of 2012. In the City, investment activity is expected to total £2.68 billion, a drop of 41% compared to the first half of last year.

Damian Corbett, lead director – central London Capital Markets at Jones Lang LaSalle, added: “The lack of supply which constrained the market in Q1 carried through into Q2 and further limited the number of investment transactions.

“This tightness in supply extended beyond the core market and left investors with very few options to consider. As a result those assets in the market were subject to competitive bidding in a number of instances and we could easily see further yield compression for best in class assets. There has also been a marked increase in appetite for core plus and value add assets, as investors become more comfortable with future prospects for the occupational market.

“Looking forward, we expect no let-up in demand from overseas investors and we are seeing the return of UK institutions to the market. We also are starting to see an increase in assets being prepared for sale, as owners look to take advantage of the depth of demand.”

Continuing the trend set in Q1, yields in the City are expected to compress, reaching 4.75% for sub £40 million lot sizes by the end of Q2, down by 25 basis points since Q1. In the West End market yields will remain stable at 4.0%, for the smallest lot sizes.

Ben Burston, head of UK office research at Jones Lang LaSalle, concluded: “Sentiment among both occupiers and investors has been buoyed by signs of broad-based economic recovery. Occupiers are showing greater willingness to commit to take space, as evidenced by the rise in pre-lets, while the strength of demand from investors has put downward pressure on Central London yields this quarter, as evidenced by the inward movement in City yields, which have now come in by 50 basis points since the start of the year. 

“The leasing and investment markets are also feeling the impact of tight supply, and as the year progresses, we expect that stronger demand in a supply-constrained environment will continue to put upward pressure on rents and capital values.”