The second quarter of 2014 has proven to be an active period for the capital’s commercial property market. In fact, the first half of this year has seen some of the highest activity levels and take-up rates since 2010. This has been undoubtedly prompted by increased consumer and business confidence, GDP growth, and a recovering labour market. Below you will find a detailed account of how the London commercial property market has fared during the second quarter of the year.
London office property market: trends and figures for Q2 – 2014
During the second quarter of 2014, nearly 3 million square feet of office space were transacted in London. The vast majority of deals involved office properties in The City and in the West End, whereas a relatively small number of deals involved office space in the Docklands area. Take-up rates were up by nearly 20 per cent on a 5-year quarterly average. Approximately 38 per cent of all deals were carried out by companies in the banking and finance sectors. The professional services industry accounted for 20 per cent of all deals, wheras the TMT sector carried out 16 per cent of all transactions.
In terms of rental values, growth has been clearly evident in nearly every sub-market. Prime rents were almost 12 per cent higher than during Q2 – 2013. In the West End, prime rents currently average £115 per square feet. Areas like Mayfair, St James, and Marylebone command the highest prices in the West End, while Battersea, Fulham, and Camden have the lowest rental values in the area. The cost of office space in The City has risen to £58.5 per square feet, and in the Docklands prime rents are in the region of £36 per square feet. There are more than 500,000 square feet under offer in the Docklands, so it is expected that rental values in this area will continue to rise during the remainder of 2014.
During this quarter, pre-letting deals constituted nearly 60 per cent of all transactions, although in some parts of the capital (such as The City), pre-letting accounted for a higher percentage of the total number of transactions. Some of the most noteworthy transactions involved properties that are still under construction in the West End, such as the office buildings at 1 Fitzroy Place, 10 Brock Street, and 10 New Burlington Street. These are expected to be completed by 2015.
Another trend worth highlighting has to do with the speed at which speculative office space is being taken up. According to market analysts at GVA, occupiers are signing up for new leases up to 2 years prior to the expiry of their current lease. In the short term, this will translate into a decrease in availability, which in turn is expected to bring about higher rental prices. Availability rates in London have already begun to decrease when compared on a year-on-year basis, as they are currently set at 4 per cent in the West End, 5.9 per cent in central London, 7 per cent in The City, and 8 per cent in the Docklands.
Reduced availability rates will also be caused by a diminished amount of office developments. During 2014, nearly 8.5 million square feet will be added to London’s total office stock. This figure is expected to go down to just over 2 million square feet in 2015 and hover around that mark for the following two years. According researchers at GVA, by 2020 there could be a further 400 office buildings in the British capital.
Growing demand and tight competition for retail space in secondary locations have been the main themes in London’s retail property market during this quarter. Supply continues to be scarce in prime shopping areas, such as New and Old Bond Street, where rental values have been pushed to £838 per square foot. Prices as high as these are mostly unaffordable for a large number of retailers, who have turned to secondary space in areas like Covent Garden, Mount Street, King’s Road, Cheapside, and Brompton Road. The retail property market in these areas has expanded considerably during the past 6 months, and rental values have increased accordingly by up to 12 per cent. Retail space in High Holborn, Fenchurch Street, and Paddington has remained stable and is among the cheapest in central London, with average headline rents hovering around £200 per square foot.
All in all, market analysts predict that retail rental values in London could rise by a further 8.8 per cent by the end of 2014.