City take-up for the first half of the year rose for the third consecutive year reaching a total of 3.3 million sq ft (Graph 8), equating to a 15% rise on this point last year. It would seem the strong take-up seen this half is due to the economy continuing to recover and move into growth combined with the increased confidence in the market, built on the success of last year.

The City saw two deals this half that exceeded 100,000 sq ft: ING’s acquisition of 125,000 sq ft at 8 – 10 Moorgate, EC2 on an 18 year lease at £51.50 per sq ft, and Mizuho’s acquisition of 196,000 sq ft at Two New Ludgate, EC4 on a 20 year lease. Last year we witnessed an increase in large deals of this nature, however this year the rise in take-up appears to have come about through a rise in transactions of small to medium sized units. This half we saw a 35% increase in the amount of space acquired in the 10,000 – 15,000 sq ft bracket compared with this point last year.

We are now starting to witness the effects of having more footloose occupiers taking space in the City through the impressive performance of the City fringe this half. The City core saw a 5% increase in take-up in the last 12 months, compared with a 23% increase in the fringe areas. This has been a result of growing sectors such as TMT, who are not tied to a specific location, being attracted by the cheaper rents found in the fringe areas.

Most sectors performed well this half, with the Insurance & Financial Services sector being the most active, accounting for 26% of all take-up. The Professional sector and TMT sector came in second and third at 16% and 13% respectively. Furthermore, it appears the recovering economy has had its effect on the Banking sector with their share of take-up rising from 1% at this point last year to 5% at the end of H1 this year.

This half has seen an increase in demand for the City’s towers. Take-up in the towers has risen by 9% on this point last year reaching 405,000 sq ft, with the Gherkin, the ‘Walkie-Talkie’, Salesforce Tower and Tower 42 now all over 90% let. Moreover, we have seen the average rent paid in the towers increase from £56.18 per sq ft last year to £62.15 per sq ft this year, and the average rent free fall from 30 months to 20 on a 10-year lease. Evidence of rising rents combined with falling incentives is what we would expect to see in a strong performing market in an easing economy as the power shifts in favour of the landlord.

Supply at the end of H1 stood at 
9.2 million sq ft giving a vacancy rate of 9.6%, of which 80% is of Grade A specification. The increase in the vacancy rate from 7% at the end of 2013 has been due to the 5.5 million sq ft of new developments or refurbishments being added to the supply figures. We forecast the vacancy rate will now begin to fall, arriving at 8% by the end of the year. This will be dependent on take-up continuing at this rate, which with 2.3 million sq ft currently under offer, seems likely.

Rents

Rents have generally either remained stable or risen this half. The average Grade A rent has remained stable currently at £47.48 per sq ft, and average prime rent has only fallen slightly from £64.45 per sq ft (at the end of 2013) to £63.70 per sq ft at the end of this half. However, if we compare the average of the top 10 rents achieved in 1H 2013 with that of 2014, we see a 10% rise from £60.70 per sq ft to £67 per sq ft.

We forecast rental growth for average Grade A buildings to rise by 6.5% next year. Moreover, further benefitting the landlords, we predict the average annual rental growth for the average prime rent will be 3.7% pa over the next four years.

Development

As previously stated, the success of the City’s leasing market is dependent on the development pipeline fulfilling the needs of a growing economy with increasing demand for office space. 
It is encouraging at first to see the amount of space scheduled to arrive over the next four years is above the long term average for each year 
(except for 2015 which is only slightly below). However, 27% of this space is already pre-let, including half of the space due to arrive next year. Therefore, we predict there will be a tightening of supply over the next 12 months, most likely resulting in a continuation of rental growth.

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