London’s commercial office market slows down as occupiers choose to stay put

Following a period of stability over the last few quarters, despite the Brexit vote, London’s office market is increasingly coming under pressure, according to Clutton’s London Office Bulletin for Summer 2017. According to Ralph Pearson, Clutton’s head of commercial agency – this is due to reduced levels of occupier activity post Brexit where there is increased instances of tenants renewing leases rather than electing to relocate. Although take up in the second quarter of this year was close to the five-year average, the main reason for this was due to activity carried out by WeWork, which accounted for the two largest deals – involving a total of 425,000 sq ft in Shaftesbury Avenue and at South Bank Place. The market has since begun to stagnate, and so far, for the third quarter of this year quoted rents have slipped across much of central London with rent free periods continuing to lengthen.

However, central London office investment volumes continue to grow. Between January and July, a total of £11 billion of investment activity in the Central London office market was recorded by Property Data, which includes both domestic and international investment activity. This compares to a total of £10.2 billion worth of deals during the same period last year. The overall proportion of investment in to Central London’s office sector has also risen to 78.2 percent of all commercial property investment within Central London, compared to 64.8 percent between January and June 2017.

Cluttons’ head of research, Faisal Durrani, explained: “International investors remain very active in the Central London office market, buoyed by sterling’s weakness. In particular, Chinese and other Asian investors have been especially active in recent weeks. The sudden activity surge has likely been fuelled by the urgency to shift capital out of China as stricter controls on capital outflows for property investment are phased in by the Chinese government”.

“While net effective rents are clearly falling, there are still pockets of the market where capital values are holding up, underpinned by a distinct lack of stock, coupled with resilient demand. This has led to some buyers, especially owner occupiers, paying strong prices for vacant buildings. With rents showing signs of softening across the market as a whole, it is likely that values may soften as the year progresses”.