The big picture: London property

Office Space

IT’S a game of two halves for central London’s commercial property market: an early trip to the showers for the office sector, while the retail sector is playing into extra time. Across London’s core office pitches, from the financial zones of Canary Wharf and the City, to the media and head office blocks of the West End, via Midtown (Holborn) the story is similar: while the investment market is still humming with overseas investors looking for a bargain, property professionals report that occupational activity has dropped off ahead of the usual summer school holiday lull much earlier than normal.

And here’s the rub: one of the reasons investors are piling into the capital is an expectation that they will be able to capitalise on rental growth pushed by the dwindling supply of grade A (brand new) space. Trouble is, occupiers don’t seem to be playing ball. “Requirements tend to be coming from UK-based businesses rather than multinationals, so they aren’t looking to take as much floorspace. Although there is 9m square feet (sqft) of requirements in the City and 3m sqft in the West End, we don’t expect to see massive deals this year,” explains property firm Savills’s director of commercial research Mat Oakley.

Despite this, prime rents are lumbering upwards, reaching £100 per square foot in the West End, albeit for small amounts of space – less than 10,000 sqft. But in the City they are struggling to go over £55, reflecting greater supply there. At the end of the second quarter, the vacancy rate for grade A stock in the City stood at 3.9 per cent, significantly higher than the 2.6 per cent recorded in the West End.

“Virtually all take up is driven by lease expiries/breaks, with relatively few discretionary movers,” says Ralph Pearson, commercial partner at property consultant Cluttons. “On the other hand, we’re seeing strong demand from developers for prime London sites, bidding at prices that reflect the expectation of further rental growth.”

Property agents reckon on a supply gap of 18-24 months before the effects of new development (see our list below for some of the exciting projects in progress) start to be felt. In the meantime there are still companies considering taking large-ish amounts of space, primarily in the City. They include: Jardine Lloyd Thompson (200,000 sqft), Schroders (200,000 sqft), the Bank of England (100,000 sqft), Capita Symonds (100,000 sqft) and Nabarro (150,000 sqft).

While the office market could do with more new tenants, the retail market, boosted by the prospect of a tourist-saturated capital during next year’s Olympics, has no shortage of takers. In the prime pitches of the West End – Bond Street, Oxford Street and Regent Street define London’s retail property epicentre – the problem is finding space. As vacancy rates can be down to zero, this often means paying an existing retailer a handsome premium to take on their lease. Fendi, for instance, paid £1.7m key money last month to move into the former Mallet store at 141-142 New Bond Street.

As tempting as these cash offers are, many existing retailers are resisting. “Over the last month, there have been at least 10 situations where a deal has fallen through despite the offer of a large sum of key money,” reports Peter Mace, head of central London retail at property consultancy Cushman & Wakefield. The throng of over 60 international retailers wanting London stores – The Kooples, Jack Wolfskin, Rabeanco and Sacour Brothers are shopfronts to watch out for – has pushed prime rents skywards. Zone A levels are £950 per sqft in Bond Street and £700 in Oxford Street.

Things are markedly different in the City, where 5-day-week trading dampens retailer enthusiasm and rental levels (£200 zone A), but in the captive market of Canary Wharf, sustained demand from retailers has persuaded Canary Wharf Group to start this September on a 20-unit 45,000 sqft extension to its Jubilee Place mall.

Commercial property advisers DeVono are warning that London’s new high-rise developments are set for mass vacancies after the Olympics.

They predict the abundance of grade A office space, the product of ambitious building projects approved for construction during the last Labour government, will ultimately drive prices down and have a knock-on effect on grade B and C commercial properties. Several of these projects, offering hundreds of thousands of square feet, were put on hold when the recession hit but have since resumed.

Adam Landau, director at DeVono, commented: “The economy is still struggling and as an occupier-led business, we see and feel the pain of our many clients. To say that the vast amount of office space being built in the city is immune to the downturn would be very short-sighted and the surge the Olympics has and still is bringing to the London market will drop off. London may be booming now but you only have to look at the struggling worldwide economies and the UK retail sector to notice how difficult it is for businesses.”