London office prices in the spotlight at Lambert Smith Hampton and Savills
The prices being asked for office space in Central London have peaked, says Lambert Smith Hampton, and we are in for a period of consolidation. The firm’s quarterly research into UK Investment Transactions shows that for the fourth quarter of 2011, Central London offices yields moved out to 5.62% from 4.90% in Q3.
Ezra Nahome, CEO of Lambert Smith Hampton, says that while prime office space in the capital will always be in demand, good secondary space is beginning to be regarded as overpriced. “We expect a move towards more realistic pricing in 2012, which will only be accentuated further in the City when the forecast job cuts in the banking and financial sector kick in,” he added.
Fourth-quarter investment volumes fell 16% q/q to £6.8bn, as the eurozone debt crisis, weak UK GDP growth and a lack of debt availability all restricted investment. “Even if the eurozone remains intact, we are going to experience a period of stagnation which could stretch all the way into 2013. The outward yield shift for Central London offices is the clearest sign yet that the market is faltering,” Mr. Nahome said.
Savills meanwhile held its annual presentation last week with Oriel Securites in the City of London, at which it issued its own forecasts for London office space. The firm expects a steady climb in rental levels for City offices to let, to £70 per sq ft, and also for West End office space, to £120 per sq ft, by 2014. It expects residential developers and retailers to put pressure on these markets, as office space is converted to other uses.
Savills says developers have already converted 3m sq ft of office space into housing in the City of Westminster alone, between 2001 and 2009. It believes that without the conversion of this space, the London office market would most likely have underperformed during this period. Instead, investment values for residential property in this area have risen to well over £3,000 per sq ft compared with £1,500-£2,000 per sq ft in the office market, while top office rental values have reached more than £100 per sq ft, figures last seen during 2006-2008.
Dominic Grace, head of London residential development, says the conversion of surplus government stock “could see the city’s leading boroughs prioritise housing over employment usage, putting pressure on both sectors as supply reduces.”
With regard to retail, Savills has noted a trend for retailers to take head-office premises above flagship stores, sustaining value in prime locations. Prime pitch rents are now £700-£1,000 per sq ft Zone A and the firm thinks investors should continue to invest in prime and “just-off prime” locations, “while keeping an eye on emerging new hot spots such as North of Oxford Street, Edgware Road, Baker Street and St James’s”. Savills’ director of Central London retail, Anthony Selwyn, says the core market in London is no longer just influenced by the business sector, but also by retail demand, supported by high tourist numbers and infrastructure improvements.
