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Q4 Report shows City fringe occupiers face a further 17% rental increase in 2014

15th January 2014

Capita's Q4 2013 Central London Overview report highlights –

  • 2013 set a new record for investment turnover at £20.9bn compared to £19.7bn in 12 months to September 2007
  • Q4 delivered the highest ever quarterly investment turnover of £8.3bn
  • Occupier take up was down across all submarkets in Q4 against Q3 figures
  • Prime rental increases over the last 12 months of 29% in Southbank and 21% in City Fringe
  • Q4 vacancy rates down in West End, Midtown, City Fringe and Southbank
  • Southbank showed the biggest increases year on year for both investment and occupier activity. Take up increased 124% on the previous year, prime rents grew 29% and investment activity increased some 800%
  • The Technology Media and Telecommunication (TMT) sector was the key driver of occupier activity in 2013 accounting for two thirds of all deals in Southbank in Q4.

View a video analysis of Q4 2013 from Andrew Mercer, Director of Investment at Capita:

City Fringe and Southbank
Rental increases were most marked in City Fringe and Southbank markets, a result of the surging TMT sector, with Q4 results showing rental increases of 8% on the previous quarter.

In the City Fringe, 12 month rolling take up has increased 49% while availability has fallen 51% leading to a vacancy rate of just 4.8%. This lack of supply has therefore resulted in some stellar rental levels being achieved for exceptional properties, such as the Buckley Building, Clerkenwell Green, where Deloitte Digital paid over £55.00 psf. However, prime rents of £42.50 psf remain the standard but compare with rates of £35.00 psf in 2011, an increase of 21%. Further rental growth of 17% is anticipated in the City Fringe market by Q4 2014.

In Southbank, it was not possible to repeat the spectacular letting activity of Q3 as development in Southbank starts to slow with just one big development, the 217,000 sq ft South bank Tower, due for completion after 2014. Headline rents in Southbank, currently at £48.50 psf, have increased by 49% from £32.50 psf over the last three years.

Exceptional deals are being done at £50.00 psf for the very best space outside The Shard such as at 240 Blackfriars Road where law firm Boodle Hatfield acquired 24,000 sq ft. Deals in The Shard are being done from late £50’s psf to mid £60’s psf with small sub lettings now available at £67.50 psf.

City
3.3m sq ft of new development is set for completion in the City during 2014 which is the largest amount of new space being delivered since the pipeline was turned off five years ago. Despite this injection of new accommodation and a vacancy rate approaching 10%, increasing demand will result in fiercer competition for Grade A space for those occupiers with larger requirements leading to further rental increases.

West End
In the West End supply also remains tight with the second lowest vacancy rate of all sub markets. The spotlight has been primarily on Mayfair and St James’s which, boosted by the return of hedge funds and wealth management companies, accounts for 42% of all development in the West End. The scramble for the very best space has led to rents of £130.00 psf being paid in Q4 however relatively few deals have been achieved at this level and West End prime rents remain at £102.50 psf with upward movement inevitable throughout 2014.

Investment
Notable transactions in Q4 included St Martins Property Group’s purchase of More London in Southbank and GIC’s 50% purchase of Broadgate in the City. At £1.7bn each these transactions set a new joint benchmark for the largest UK commercial property transactions recorded and Q4 achieved £8.3bn in investment turnover, the highest quarter result ever recorded.

2013 set a new benchmark for investment turnover and these results are likely to set the tone for the year ahead with further downward pressure on yields expected in all London sub markets. In 2014 the market will see a further return of UK investors who are set to compete with an increasingly diverse range of international investors among whom Chinese insurance and pension funds are becoming increasingly evident.

Andrew Mercer

Andrew Mercer

Director of Investment, Capita

 

Outlook

  • Rent free periods will reduce significantly in the West End, falling to 8/10 months for a 10 year term. They hit 24 months at the bottom of the market and were 15 months in Q4
  • Prime City Fringe rents will increase to £50.00psf during 2014 from £42.50 psf in Q4 2013 and £35.00 psf in Q4 2011
  • Pre-letting activity will encourage development starts to reach the highest levels for a number of years and we will see a resurgence in refurbishments
  • Occupiers will increasingly look to move when it suits them rather than waiting for lease events and many will secure flexibility or accommodation that allows expansion
  • The blurring of traditional boundaries between Central London property markets will see ‘fringe’ areas increasingly merge into the mainstream, a trend accelerated by Crossrail. A ripple effect will become evident, creating a new wave of fringe markets in areas such as Camden and less established areas within Southwark.

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