Supply shortage to boost City, West End office rents – Savills
Savills says rents for available office property in the City of London will “kick up” to £65 per sq ft by 2012, with rents for West End offices set to rise to £111 per sq ft. At its annual client presentation in conjunction with Oriel Securities in the City last week, the firm said the main driver of take-up would be lease expiries, with over 5.5m sq ft in the West End and City in 2010 set to rise to more than 6m sq ft in 2012.
Last year, demand was driven by large units, with nine lettings of more than 100,000 sq ft, but Savills says the reverse will be the case this year, with most occupiers seeking space under 50,000 sq ft. Properties of this size are in short supply in both the City and West End. Mat Oakley, head of commercial research at Savills, says fringe locations such as Paddington and Kings Cross, where there is some stock, will see rising demand as a result. “Meanwhile austerity measures are set to provide the prudent landlord with an opportunity to redevelop public sector space that has been disposed of,” he added.
Demand from foreign investment buyers will continue to push yields downwards, Savills forecasts. Last year, 70% of buyers were from overseas and they accounted for 25 of the 33 £100m-plus deals that were agreed in 2010. The firm calculates that 20% of all the investment properties sold in the City last year were bank-led sales, and thinks that the focus on distressed sales will also continue in 2011.
The level of development activity remains at a record low in the City, and is also low in the West End. While the impending shortages of stock might be relieved to some extent by forecast reductions in government assets – the government currently occupies 19m sq ft in London, 70% of which is in the West End, according to Savills data – the vacancy rates in both City and West End markets are expected to fall. “So far this has resulted in a rental rise of 11% during 2010 but we think there will be more positive growth in 2012 as employment regains its losses and undersupply really hits,” Oakley continued.
