During the last quarter of 2016, and much in line with the rest of the year, a cautious approach has been the predominant theme in London’s commercial property market. Broadly speaking, the market saw a consolidation of the trends that were evidenced earlier in the year, namely weak occupier demand (particularly in the office sector), moderate rental growth levels, and a surge in the number of occupiers looking for flexible lease terms.
Office Market
Political uncertainty and fluctuations in the value of the pound caused a slow-down of the office market during Q4. However, while take-up rates were down when compared to the long-term average, they noticeably picked up towards the end of the year. With regards to the causes behind this slow-down, market analysts at Green Street Advisors have drawn attention to factors other than the current political climate. For instance, the implementation of advanced technologies and automation is expected to have far-reaching effects in industry fields that are considered major office occupiers, ranging from finance to customer service.
The main office market indicators behind end-of-year data showed that Grade A absorption and take-up rates were down when compared to the city’s 10-year average. At the same time, availability rates for office properties across the city increased, and rental values remained stable. Market indicators for West End office units followed this pattern with the exception of rental rates, which evidence a slight decrease of 5.2 per cent, mainly in Marylebone, Knightsbridge, and Bloomsbury. In other parts of the West End, rental values remained stable thanks to a combination of flexible incentive packages and low vacancy rates. The highest rental rates were in Mayfair and St James’ (£118 / sq ft), whereas the lowest were in Paddington and Bloomsbury (£67.50 and £68.50 respectively). Vacancy rates were at their highest in St James’ (close to 10 per cent), Paddington and Bloomsbury (6 per cent). Key occupiers were business services, media, tech, and finance.
In the City of London, vacancy rates remained under the decade’s average and were particularly high in Clerkenwell and Holborn (above 6 per cent), and also in the Docklands and Aldgate. In Canary Wharf and the city core, vacancy rates hovered between 3.6 and 3.8 per cent. Moreover, up to 1 million square feet of grey space were on offer towards the end of the year and absorption rates for this type of space were positive in Canary Wharf. Rental values were at their highest in Holborn and the city core (£70 / sq ft) and at their lowest in Aldgate (£60 / sq ft). According to research from Colliers, a breakdown of take-up by business sector revealed that finance, media, and technology are the key City office occupiers, followed by business services, legal, retail, and leisure.
Investment activity proved to be more or less stable despite the fact that many sale transactions involved lower-than-average yields. Towards the end of the quarter, prime yields for office properties in the West End and the City averaged 3.25 and 4.25 per cent respectively. During Q4, investment transactions in central London continued to be dominated by overseas investors, mainly Asian. Following a few large transactions in December, this sub-market reached an annual turnover level of over £16.8 billion.
Retail Property Market
The retail property market remained under pressure during the last 3 months of the year, but overall proved resilient. This is especially true of the leisure / A3 sub-sector, since central London rental values continue to be among the highest in the world in areas like Mayfair and Soho, where they average £150 / sq ft.
The 2016 Christmas season helped boost retail sales across the capital city, in some cases bringing retailer turnover to double-digit growth. Occupiers involved in fashion, general merchandising, and the food and beverages sector were the main drivers of growth of the retail property market during the festive season. On the other hand, demand for retail properties in shopping centres was noticeably strong in London fringe markets located within the M25, and the trend is expected to continue well into 2017.
Lastly, it is worth mentioning the performance of Central London gyms, a specialty commercial property sub-market that performed strongly during the last quarter of 2016. This sub-market experienced unprecedented growth levels across various property types, from those suited to luxury gyms to studio concepts, health clubs, and smaller operations of up to 5,000 square feet. The current asking rates for this type of retail property range from £14.40 / sq ft (mid-market gyms) to £27.80 / sq ft (studios). Victoria, Shoreditch, and Farringdon have been listed as the areas with the most potential for growth in this respect.
Sources:
(1) https://realestate.ipe.com/markets-/sectors/office/office-europe-mixed-fortunes/10017338.article
(2) http://www.colliers.com/-/media/files/emea/uk/research/offices/17001-londonofficessnapshot-january2017-v8web.pdf?la=en-GB
(3) https://www.propertyinvestortoday.co.uk/breaking-news/2017/1/central-london-office-investment-to-top-17bn-says-savills
(4) http://www.propertywire.com/news/europe/overseas-investors-boosted-central-london-office-market-brexit-vote/
(5) https://kfcontent.blob.core.windows.net/research/395/documents/en/property-outlook-2017-4302.pdf
(6) http://www.colliers.com/-/media/files/emea/uk/research/retail/20170113-colliers-international-christmas-trading-results-summary.pdf?la=en-GB
(7) https://kfcontent.blob.core.windows.net/research/103/documents/en/q4-2016-4310.pdf
(8) http://www.colliers.com/-/media/files/emea/uk/research/retail/201701-central-london-gym-review.pdf?la=en-GB