Across the United Kingdom, the third quarter of 2015 has been marked by acceleration in GDP growth rates and by the strong performance of the service sector. These factors have had a positive effect on the country’s commercial real estate market, which has experienced increased stability and growing demand over the past three months. This trend has been particularly evident in the British capital, as summarised in the report below.
London Office Market: Trends and Highlights
In line with previous trends earlier this year, the office market in central London has continued to be driven by increased demand and record rental values have been the predominant theme in the West End and core city office locations. A Cushman & Wakefield market report revealed that in August 2015, availability for all office space types in Central London dropped to 9.7 million square feet, a figure that represents a 3.7 per cent decrease over the previous quarter. This record-breaking figure is also below the decade’s average, which stands at 15 million square feet. According to the report, the amount of office space under offer in central London has also increased substantially during this past quarter, growing by more than 4 per cent, or 60 per cent higher than the past 10-year average. It is estimated that there are currently 4.4 million square feet of office space under offer in central London.
Another key trend that has emerged over the past quarter is related to the large number of FinTech start-ups that have been launched across London. CBRE market analysts have reported that FinTech clusters are now well defined in areas like Canary Wharf, which is home to nearly 10 per cent of all recent start-ups in this industry sector. Office space in the South Bank is also highly sought after by FinTech start-ups, with postcodes like EC2A and EC1V following suit, and with another FinTech cluster evolving in and around Tech City, also in East London. If current market trends are anything to go by, in the near future we can expect to see a surge in demand for incubator space coming mainly from FinTech firms, as well as larger floorplate requirements, given that many of these companies are ready for expansion.
Generally speaking, the third quarter of the year has been characterised by a sharp decrease in the availability of prime office space both north and south of the M25. In some locations, such as Hammersmith and Wimbledon, vacancy rates are down to single digit figures (2.7 and 3.7 per cent respectively). Also in these sub-markets, record rental growth has been experienced with regards to both Class A and Class B office stock. Average rents in Hammersmith were reported to the be in the region of £52.50 / square foot, £42 in Wimbledon, £50 in Chiswick, and £31.5 in areas near Heathrow airport. In addition, significant investment activity was recorded during the earlier part of Q3 in the White City (thanks to a transaction involving a 187,000 square feet building), as well as in Hammersmith and Hanger Lane. Currently, investment yields for office properties in London range between 3.5 and 4.1 per cent.
Market analysts at Colliers International have also drawn attention to the increasing intensity of the so-called “Crossrail effect”, which is gaining momentum in both core and fringe London office sub-markets. This trend has resulted in more homogeneous rental values across the British capital’s different sub-markets. For instance, it has been reported that prices for office premises in Fitzrovia and Marylebone have come close to those in the West End and the City for the first time ever.
Retail and Industrial Space in London
A higher sales volume and favourable trading conditions were the key trends that characterised the retail property market in London over the past quarter. Availability rates are beginning to evidence a critical shortage of retail space, which is not likely to improve until some of the developments currently underway are completed. Some key projects include the expansion of Westfield Shopping Centre, which will add 800,000 square feet of retail space to the city’s stock by 2017, and the redevelopment of Croydon’s Hammerson retail centre, which will provide 1.5 million square feet of leisure and retail space. During Q3, investment activity has mainly focused on properties in shopping centres, with the most notable transaction including the sale of Angel Centre in Islington at an initial yield of 4.1 per cent.
Industrial space continues to be in short supply in London, particularly when it comes to distribution space. Space shortages have caused a noticeable increase in rental values for properties in secondary locations, and rent increases have reached average values of 13 per cent across London.
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