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Monday, August 11, 2014

Rents continue to rise in London

By Mark E. Rose (Toronto)

As a follow-up to my blogs on the North American commercial real estate markets last week, I’d like to now have a closer look at the U.K., where Avison Young opened two offices this spring, in London and Thames Valley.

In Central London: The current office vacancy rate is 7.2%, with a sub 5% level in some districts, such as Victoria, Bloomsbury and Holborn. The average West End headline rents are £100 per square foot (psf), up from £65 psf at the low point in the market in the third quarter of 2009. The average City headline rent is £60 psf, up from £42.50 psf from that third-quarter 2009 low point.

There is 4.5 msf in the development pipeline, but take-up for new-build space was 5.5 msf in the last year, suggesting we are moving into a period of mismatch between demand and supply. Therefore, Central London offices’ shortfall is set to become acute from 2015 onwards, and this trend suggests that rents will continue to increase.

On the investment front, yields in prime office investments in the West End have remained steady at 3.75%, while yields in the City have hardened to 4.5, the lowest level since the second quarter of 2007. £2.2bn transacted across London in the first quarter of this year. Private Investors are prolific in the West End, transacting more than 60% of the deals in the first quarter for a total of £454 million. In the City, investment is led by pension and life insurance companies, which transacted £404 million, or approximately 35% of the total volume, in the first quarter.

In the South East, the vacancy rate ranges from 6.8% to 8.3%, and take-up is being led by the financial and business services, who represent 28% of the market. Rents range from £18 psf in Basingstoke to £32 psf in Maidenhead. Prime headline rents increased by an average of 5% over the past 12 months, and they are expected to continue increasing due to the ripple effect of tenants being priced out of Central London. On the investment front, there is a lack of buying opportunities in the South East, putting pressure on the pricing, and yields have therefore hardened to 5.25%. UK Funds remain the dominate buyer in the South East market, but overseas buyers are starting to compete there.

Thank you and please watch for the Avison Young Mid-Year 2014 Canada, U.S. Office Market Report next week. 

You can also now listen to my Q3 2014 Commercial Real Estate Audiocast “New office supply outpacing demand in Canada, int’l capital continues to favour U.S., rents continue to rise in London” here: http://www.avisonyoung.com/media-room/ceo-video-audiocasts

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