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London office shortage sees rents soar

A shortage of office space in London is forcing up commercial rent rates and attracting international investors to the capital’s property market, a report published by Capita Symonds today revealed.

Figures released by Capita Symonds’ real estate division have revealed that the central London commercial property market is set to face its worst Grade A office shortage since at least 1980 due to a dearth of both new developments and prime stock.

As a result, rents in London are set to rise rapidly over the next two years with headline rents set to reach £100 per sq ft in the West End and £65 per sq ft in the City by 2013 (currently £70.00 per sq ft and £55.00 per sq ft respectively). Over the last year alone office rents in some parts of central London have risen strongly, including 16 per cent in the City and 18 per cent in Midtown.

The report says that overseas investors and sovereign wealth funds are seeking secure long term income streams and see London as a safe haven in the face of increasing political uncertainties elsewhere in the world, particularly the Middle East.

“Two years ago this situation would have been unthinkable,” said James Gillett, director, Capita Symonds’ real estate division.

“Companies were in a great position with a surplus of good space resulting in aggressive financial offers from landlords desperate not to lose tenants. For businesses looking to move those days have passed - the boot is firmly on the other foot.”

Capita Symonds’ report highlights how, over the last year, office availability has fallen in almost every central London market, including a 14 per cent drop in the West End and over 20 per cent in Midtown and Docklands. Lack of supply was compounded by the fact that only twelve deals above 20,000 sq ft took place in central London and the City during Q1 - less than a third of the level (39) of a year ago.

Overall, investment activity across central London markets also fell from nearly £3.6 billion in the last quarter of 2010 to less than £1.38 billion in Q1.There was minimal investment activity taking place in Southbank, Docklands and City Fringe and sharply reduced activity in the West End, City and Midtown.

“In terms of availability, although there will be some decent sized disposals later in the year (JP Morgan, for example, is set to release one million sq ft), this will be overshadowed by the fact that only 1.7 million sq ft in total of new space is due for completion in 2011,” added Mr Gillett.

“With development completion in 2012 also set to touch unprecedented lows, availability is unlikely to improve in the near future.”

Despite a fall-off in demand over the quarter, the central London office market continues to thrive and is seemingly immune from the broader national trend, providing further confirmation of the two speed market that has been evident for some time.

The point is clearly illustrated by 2010 figures produced by the IPD (Investment Property Databank) showing average rental growth for central London of 5.7 per cent while the rest of the UK was negative at -2.6 per cent. Annualised rates based on Q1 data for 2011 again show central London as positive while the composite figure for the rest of the UK remains at -2.6 per cent.

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