City rents jump on supply crunch

RENTS in the Square Mile will rocket by 19 per cent this year as a slowdown in the rate of new developments creates a supply crisis, property consultant Knight Frank warned yesterday.
Rates are predicted to jump to £52.5 per square foot as international companies expand their City headquarters and the availability of space falls. Rents could hit £67 per square foot by 2014, Knight Frank said.

Japanese investment bank Nomura, Australian natural resources specialist Macquarie and BlackRock, the fund manager, are just three players to have signed up for fresh headquarters in recent months. In a sign of how far rental prices have already bounced, BlackRock will pay £50 per square foot on its 25-year lease on an office block at Drapers Gardens after an initial rent-free period runs out.

Hedge fund managers looking for space will also find their wallets lighter. Rents in Mayfair and the West End are forecast to surge a record 11.5 per cent to £72.5 per square foot.

Ker Gilchrist, head of investment at Knight Frank, said London was uniquely insulated from the difficulties faced by landlords in other parts of the country thanks to its global exposure.
Recovering profits at financial services firms have led many to consider upgrading their offices, he said, while circling sovereign wealth funds are indirectly pushing up rental prices through buying activity.

At a briefing at the Dorchester Hotel yesterday, Knight Frank predicted the 12 per cent fall in office availability in the City would culminate in a “supply crunch” in 2011.

Will Beardmore-Gray, head of City leasing, said: “It’s going to be dramatic. One effect of the collapse of Lehman Brothers [in 2008] was to stop speculative development, so for the past two years we’ve seen no new development starts. As a result, there’s going to be significant competition for grade-A accommodation across London.”

The figures come despite fears that stricter regulation and higher taxation could result in an exodus of hedge fund entrepreneurs and proprietary traders to countries with more lenient regimes. They are borne out in the residential market where 41 per cent of letting agents said they had more prospective tenants than properties in the fourth quarter.

However, some analysts believe the end of the state’s £200bn quantitative easing programme and the prospect of increased interest rates towards the end of the year will reverse some of the gains in rental prices.