The central London office market is set to experience another year of above average leasing and investment activity in 2016, according to a new report.
However, some 22 million square feet of space could be needed in the next five years, says the analysis from international real estate advisor Savills.
Low vacancy rates will help prime rents to climb, although a lack of new buildings capable of demanding the highest rents is likely to lead to topmost rents stabilising over the course of the year, the report explains.
Whilst the gap between average prime City and West End rents continues to widen at £74.15 per square feet and £106.98 per square feet respectively, elsewhere there has been a marked convergence of rents on average Grade A/B office accommodation across Central London. This is likely to mean less movement of occupiers from West to East London or from core to fringe locations.
Longer term, Savills predicts that population and economic growth, combined with lease expiries and building obsolescence, could lead to 22 million square feet of additional space being required in London over the next five years.
Part of this demand will be serviced by four consecutive years of above average levels of completions in both the City and West End markets, although 21% of space in the City has been pre-let, and 15% in the West End.
In the investment market, non-domestic investors attracted by London office’s relative stability and strong comparative returns will continue to drive demand, with 2016 set to be above average in terms of investment volumes.
Despite stock market volatility and concerns over a slowdown in the Chinese economy those international investors who have been canvassed continue to identity London as a core focus for their future direct investment activity, with Savills predicting further capital flows from the Middle East, China and North America.
Notwithstanding the continued appetite from overseas, Savills expects the market to consolidate around an appetite for core plus and value-add opportunities and therefore a continued sharpening of prime yields, currently at 3% in the City and 4% in the West End, is unlikely to continue. Volumes may well fall as the market becomes more hesitant in the lead up to the outcome of a Brexit referendum.
‘We predict that the Central London office markets will see above average take-up, rental growth and investment volumes in 2016, but these increases will not be as notable as they have been in recent years,’ said Mat Oakley, head of commercial research at Savills.
‘We don’t foresee that an increase in the Bank of England’s base rate will have an impact on yields whilst rents continue to rise. As with the investment market, the leasing market may slow due to external factors such as further ripples from China’s slowdown and a drop in business confidence in anticipation of a Brexit referendum,’ he added.