Midtown, Southbank and City Fringe yields fell 0.25% in Q3 to 5% in Midtown and Southbank and 5.25% in City Fringe according to Capita’s Q3 Central London Overview.
But fringe yields remain above the record lows seen in Q1 2007 of 4.5% in Midtown and 4.75% in Southbank and City Fringe. A raft of deals transacted in the fringe markets during Q3 below 5% suggest that fringe yields have further to fall. These deals include:
Employment levels being at an all time high of 5.6 million has pushed take up data to 2.7 million square feet (sq ft) in Q3. By the time all transactions are reported, take-up is likely to exceed the long run quarterly average of 3 million sq ft for the eighth successive quarter. A further 4.8 million sq ft is under offer.
Availability in central London decreased by 9% in Q3 (a 25% decrease since September 2013). This is the fifth consecutive quarter of decreasing availability and the market has now reached the levels last seen in 2007.
The largest occupier transaction this quarter was a 431,000 sq ft pre-let of Principal Place for Amazon’s headquarters, agreed with Brookfield Property Partners. This deal reinforces the importance of the digital sector in driving take-up and the desirability of the northern City fringe market. The strength of the West End market was demonstrated in Q3 by British Land which reported that its 2.4 million sq ft office portfolio has a 96% occupancy rate, up from 88% at 31 March 2014.
Development completions in 2014 will hit a five-year high. But, theyâ€™ve been running below the long-term average since 2010 and the pipeline for the next two years is limited. Low availability and robust demand have created headline rents in the City and Midtown which are now an average of 6% higher in the last 12 months. They will soon surpass the 2007 highs of Â£70 per sq ft in the City and Â£65 per sq ft in Midtown. Rents in the fringe markets are already at record levels having increased by 14% in the last 12 months.
Central London agency team
Net investment in Central London during the 12 months to the end of September amounted to £19 billion, compared to £17.1 billion during the same period last year. This indicates that after allowing for some quarterly volatility, investment demand is showing no sign of easing.
As UK institutional investors continue to seek value beyond the core West End and City markets, yields hardened in Midtown, Southbank and City Fringe by 0.25% in Q3 to 5% in Midtown and Southbank and 5.25% in City Fringe. Furthermore, deals transacted this quarter suggest there is further yield compression to come. This is backed up by the fact that whilst the core West End and City market yields have been at historic lows for some time, the yield in fringe markets remains above the record lows achieved in Q1 2007 of 4.5% in Midtown and 4.75% in City Fringe and Southbank.
Investment director â€“ real estate
Yields on prime Central London offices as a whole are now more than 160 basis points below their long run average, and 25 basis points below the level seen in June 2007.
Mercer continues: “Whilst downward pressure on yield remains in all London sub markets, one consequence of the economic recovery is that the sterling has strengthened in value by 11% since March 2013, making UK property more expensive for overseas investors. With 51% of purchases in Q3 transacted by overseas buyers, the weight of foreign money is such that this has not impacted on demand to date. However, with growing inflows of UK institutional money we may start to see UK buyers becoming more competitive in core markets.”
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