Central London office rents are set to rise

Published 01st Jan 2010

The cost of renting an office in Central London is set to rise this year as the effect of a two-year development drought finally bites.

Rents for prime space have stabilised at £42.50 per sq ft in the City and £75 per sq ft in the West End. Cushman & Wakefield, the property consultancy, said there had been a flurry of lettings in the past three months that had soaked up much of the existing floorspace, leading to greater upward pressure on rents. The 2.6 million sq ft of space that was let in the last quarter of 2009 was the highest quarterly figure for more than two years — since the third quarter of 2007.

In contrast, the 5 million sq ft of floorspace under construction in London is 42 per cent lower than 12 months ago. Cushman said that pressure on rents had “narrowed the opportunity” for tenants to secure new premises at historically low rent levels and to negotiate incentive packages with landlords.

Most property commentators agree that rents will rise again over the next 12 months, after falling from a peak of £65 a sq ft in the City and £130 a sq ft in the West End in December 2007. However, the outlook for capital values for all types of commercial property around the UK is more mixed. Prices have risen by more than 5 per cent since last August but there are fears that a flood of properties coming on to the market from anticipated sales by the banks and the Government, a possible rise in interest rates and further company administrations may offset some of the recent gains.

However, demand from investors is not expected to subside as the threat of inflation pushes those with cash into asset classes that will not see their value eroded.

Michael Marx, chief executive of Development Securities, a developer that specialises in commercial development in the South East, said that the possibility of a return to inflation could persuade those holding cash to put their money into commercial property. Mr Marx said: “In 2010, the big players will be cash buyers, people with a surplus of cash who want to invest. This will be the pension funds, unit trusts and large private investors, as well as billionaires and sovereign wealth funds.

“The big idea might be that inflation is around the corner. That’s all you need to create an asset bubble. If you think that inflation is around the corner, you will deploy so that you are not in cash any more. Real estate will be a beneficiary of this switch out of cash.”

Mr Marx said that the sheer volume of cash that is being ploughed into UK commercial property is starting to push up the value of “secondary” shops, offices and warehouses — those that are less well located and have less secure and shorter leases.

Source: ' Times '

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