Central London office leasing bounces back after referendum vote

The amount of central London office space leased by businesses bounced back from a pre-referendum dip to reach 980,400 square feet in July, according to the latest research.

This 24% above the level seen in June and the strongest monthly average since March this year, according to global real estate advisor CBRE.

Appetite for London office space was validated by three deals over 50,000 square feet in July, including a major move by Wells Fargo for 220,700 square feet of space in the City of London

The report points out that this move has been widely seen as a vote of confidence from the banking and finance sector after the UK voted to leave the European Union. The sector accounted for 31% of take-up in July, followed by the business services sector at 22% and creative industries at 17%.

However, July’s office take-up in central London remained below the 10 year average of 1.1 million square feet per month, but above trend leasing activity in the City and Southbank which CBRE says suggests that businesses still see London as an attractive place to locate.

‘Much has been said about the health of the London office market this year, but clearly demand for office space remains buoyant. Businesses are still confident about London’s significant advantages as a global business centre, even when the UK is outside the EU. This continued demand, mostly driven by key lease events, in a market with low supply, is maintaining headline rents at the same rate as in May and June,’ said Emma Crawford, head of London Leasing at CBRE.

‘Of course the jump in leasing activity is good news for the market, and whilst this is not universal across all sub-sectors of the London market, even with heightened economic and political uncertainty, longer term prospects remain promising,’ she added.

The data also shows that available office space increased by 2% over the month to stand at 13.6 million square feet but remained 7% below the 10 year average, as secondhand, completed and pipeline space continues to enter the market.

The development pipeline is strong, but much is pre-let, with 46% of the 5.1 million square feet of space expected to complete before the end of the year already pre-committed to occupiers.

Office space under offer fell by 14% over the course of the month to stand at three million square feet as a number of large deals completed. This is 7% above the 10 year average of 2.8 million square feet which CBRE says is another indicator of strong demand.

A separate CBRE report shows that rental values across the UK’s commercial property market were steady in July, while capital values fell by 3.3%. But it points out that the fall in capital values was widely expected and pulled year on year growth down to 0.4%.

The report explains that heightened economic uncertainty, especially for financial services firms, hit offices in the City of London, shrinking capital values by 6.1%. But overall, capital value decline in the central London office market was the same as for offices across the UK, at -4.1%.

Capital values in the retail sector fell 3.6%, but the industrial property segment was more insulated with a lower fall of 2.2% for the month, reflecting continued strong demand but weak supply.

Rental value growth dipped to zero in July from 0.2% the month before, holding steady across office and retail sectors, including central London offices, and growing by 0.1% in the industrial sector. Downward pressure on rental values came from standard shops within the retail sector, which fell by 0.3% overall, and 0.6% outside the South East.

‘Capital value growth was always expected to falter at some point during 2016, as global economic uncertainty cast doubt on the likelihood of the strong growth seen in previous years persisting for much longer. The Brexit vote has now crystallised that expectation, though it is not the only driver of it,’ said Miles Gibson, head of research at CBRE UK.

‘It’s reassuring to see rental values have held firm in the face of this heightened uncertainty, a positive sign that the UK occupier market remains strong, sustained by record levels of employment, and low borrowing costs,’ he explained.

‘It will be some time until we understand the full impact of the Brexit decision, but the Bank of England’s base rate cut and more quantitative easing are likely to be supplemented by a similarly supportive fiscal stance in the autumn,’ he added.

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