H1 2014 take-up reached two million sq ft, 18% ahead of long-term average levels for the first six months of the year. Unlike 2013, no one large transaction skewed take-up levels, rather it is a pick up in overall occupier activity due to positive news regarding the UK economy. We recorded 188 transactions in the first six months of 2014, compared with 130 over the same period last year.

Who has been driving this demand? The Technology, Media & Telecoms (TMT) sector continues to dominate take-up accounting for 28%. As forecast in our previous report, 
the Insurance & Financial Services sector has experienced an increase 
in take-up levels. Over a 10-year period (2004-13) the sector has accounted for, on average 11.5% of annual take-up, in H1 it took a 15% share, its highest proportion since 2007. The latest CBI/PwC Financial Services Survey shows that optimism continues to grow amongst UK Financial Services against a background of improving economic growth, with most sectors planning to increase headcount.

The most significant story of H1 2014 is the low vacancy rate, in May it fell to 3.5% equivalent to 4.2 million sq ft of supply, its lowest level since December 2007. This is also being experienced at a submarket level with all 12 submarkets in the West End currently experiencing less than two years of supply (six of which have less than one years supply).

This has resulted in the pick-up in pre-letting activity, H1 2014 has seen 284,500 sq ft in eight pre-lets, this is already in-line with the 10-year annual average of eight pre-lets per annum. We expect to see a continuation of this trend over the remainder of the year.

Developments

Looking at supply going forward, 
over the next four years we estimate 2.1 million sq ft completions per annum, slightly ahead of the 1.8 million sq ft historic average. 2016 is set to experience a boom in development activity, 2.8 million sq ft is expected to complete, the highest level since 2004. Furthermore, development activity in six West End submarkets over this period is >20% ahead of average annual submarket completions over the last 10 years (2004-13).

Looking at these figures in more 
detail, the 2014 development completions have already been included in our supply figures, 45% of which has been pre-let. Over the next three years (2015-17) 10% of pipeline is committed and the same proportion is a significant refurbishment. Discounting this, the development pipeline still looks fairly robust delivering 1.8 million sq ft over the next three years. Refurbishment activity is on the decline (accounting for 16% in 2015, down from 62% in 2012), a sign that the restrictions on development finance have eased considerably.

We do not expect to see any further significant falls in the vacancy rate, this is reinforced by the addition of approximately 720,000 sq ft of 2015 development completions to our supply figures over the remainder of 2014. Significant schemes to be added include; 130,000 sq ft at Blackstone’s Adelphi, 188,000 sq ft 
at Land Securities Zig Zag and 80,000 sq ft at the Crown & Exemplar's W5, New Burlington Place scheme.

Requirement levels stand at 2.9 million sq ft; this is in-line with the 12-month average. 27% of requirements are from the Insurance & Financial sector, the largest of which is Jupiter Asset Management’s 60,000 sq ft search, who are rumoured to be under offer 
at Zig Zag.

Rents

Average prime rents reached £103.33 per sq ft in Q2, up 4% on Q1 and their highest level since Q4 2007. This rental growth has been positive for some landlords in the West End's core markets however is this the same across all submarkets? In short, yes, average Grade A rents have also reached 2007 levels at £73.00 per sq ft. Conversely, average Grade B rents remain at well below peak levels indicating that tenants remain heavily biased towards the best quality space.

Taken from
Review and Outlook: Central London Offices - September 2014