West End offices

The occupier market remains distressed, however, we are moving into the months of recovery. With the biggest uncertainty being to what extent firms will cut staff and trickle second hand space onto the market. Over the last few months we have seen the economy become more stable and financial confidence has turned positive; although we will see West End businesses continue to shed staff beyond the recovery in output, the market does not seem to be as bad as the figures suggest, and there has been a rise in active requirements. Owner occupiers are still remaining cautious despite the improved markets yet do not want to expand until certainty is back.

Businesses are assuming little growth over the next five years and as such demand is likely to remain below previous levels. With dramatic falls in rents and letting activity, the speed of the decline has slowed and there has been a noticeable rise in both occupier enquiries and viewings as market sentiment improved. Whether this interest translates into actual take up over the next quarter will be the real test of improvement. We anticipate that take-up will begin to recover over the next six months at a slight delay to the forecast recovery in the wider economy.

Supply
Availability continues to rise with an increase of eight percent on the previous quarter with Grade A space representing over 53 percent of availability. Vacancy rates have increased to 7.8 percent. Developers continue to hold off on pipeline schemes, consequently there are much less speculative starts than in previous years. There are still on-site schemes which will feed into supply, however, looking beyond 2010, the slowdown in development starts should re-establish and balance in supply and demand. In 2010/11 we will see an interesting market with several prime buildings in secondary locations coming to the market and it will be interesting to see how businesses re-evaluate the importance of affordability against location. 

Investment
There is a prevailing optimism in the West End investment market, and the question now being asked is “Has value returned to the central London office market?” As previously mentioned, we mustn’t get ahead of ourselves, businesses are still cutting staff and there have been dramatic fall in rental values, but overseas investors, encouraged by the weakness of sterling, have been tempted to take on lower yields on quality stock to secure tenants on long leases. However yields being achieved are being compressed due to active interest and lack of real supply. Largely demand is coming from overseas and opportunity funds looking for income driven deals. There is still a huge demand for prime buildings with long leases but these remain in short supply; and when they do come to the market we are seeing overseas investors regularly outbidding national buyers.

Attractive returns are achievable for investors who get their timing right. As we put this turbulent year behind us and look into 2010, opportunities will emerge in the WE and central London market, with attractive performance awaiting the proactive investor.

Lily Simpson is Head of Business Development at Quintessentially Estates