Q3 2017 heralded the fifth consecutive rise in London quarterly offices take-up, reaching three million sq ft, the highest quarterly total since Q1 2016, according to new research from global real estate advisors, Colliers International.
London investment volumes in Q3 totalled approximately £3.4 billion, which was a significant improvement on Q3 2016 (£2.9 billion), although a marginal reduction quarter-on-quarter (-4 per cent).
While post referendum uncertainty held down volumes in Q3 2016, 12 months on, the shortage of supply in the West End is clearly frustrating demand. Colliers forecasts that 2017 volumes should exceed £15 billion in London, eclipsing the ten-year average (£14.6 billion).
“Landlords and developers will be encouraged that take-up has risen above the 10-year quarterly average for the first time in 18 months; but there is still caution over pricing. While the availability of new space has continued to decline, occupiers remain focussed on value and on maintaining a priority on cost control,” said Guy Grantham, director, research & forecasting at Colliers International.
Pre-letting activity in London continued to surge, reaching a 36-month high, boosted by Deutsche Bank, which signed a pre-commitment with Land Securities for a new City HQ at 21 Moorfields (470,000 sq ft), despite open concerns about the Brexit process.
“A significant change since the beginning of the year is the widening variety of business sectors demanding space, which is starting to readdress the swing we saw towards media and tech in 2016. However, competition for new Grade A product in core markets is intensifying and there is increasing concern about potential supply shortages in 2018 and 2019. This is driving occupiers with larger requirements in excess of 50,000 sq ft to look at pre-commitments as a way to secure prime product in desired locations,” adds Grantham.
Overall, vacancy has continued to rise across London to 5.5 per cent (11.9 million sq ft), but it has slowed markedly in the last three months with Colliers forecasting it to plateau in 2018 due to the lack of offshoring and grey space evident in the market.
The City office market saw transaction levels bounce back sharply by +38 per cent (847,000 sq ft) in Q3 to achieve a 30-month high.
“Demand from the financial services sector for office space in the City has more than doubled quarter-on-quarter to (+75 per cent), suggesting that the initial fallout from the EU referendum is beginning to abate. City investment volumes have also rebounded to stand at £2.3 billion in Q3 2017, bolstered by considerable overseas investment,” said Grantham.
Asia-Pacific investors account for 75 per cent of investment volumes, but concerns over impending capital flow restrictions are still mooted explains Grantham: “Chinese capital controls are not expected to slow the market, but if controls are tighter than anticipated, a new tier of South Asian and Middle Eastern investors are likely to step in and with healthy availability of new lots in due Q4, there is potential for the City market to see further improvement in volumes.”
Take-up of new/refurbished space in the West End was broadly flat quarter-on-quarter at 3.3 million sq ft, however the availability of new space fell by 45 per cent compared to just 12 per cent in Q2 2017.
“The West End continues to feel the effect of critically low Grade A space, which is now being exacerbated by the appetite for product from blue chip corporates. Sub-trend supply in 2018 will only accentuate the speculative development famine,” warns Grantham.
Just 32,000 sq ft of new speculative space came to market in Q3, in contrast to the 601,000 sq ft that was delivered in H1 2017. In Q4 a further 290,000 sq ft is expected to be delivered, but in 2018 the overall speculative figure is set to be 15 per cent down on the 2017 total and likely to further compound supply shortages.
Media and tech remain the largest source of demand, although flexible workspace providers continue to be highly acquisitive, accounting for 18 per cent of market share in 2017 to date.
Investment activity in the West End in Q3 followed a similar trajectory to the previous two quarters, as supply constraints continued to drag down volumes. Despite Q3 volumes coming in at £1.1 billion, a fall of 8 per cent quarter-on-quarter, the average deal size remained consistent at £98 million.
“We anticipate continued stability in terms of pricing and yield profile, although investors will continue to monitor occupier markets closely, as well events in Brussels over the next three to six months,” concludes Grantham.