Knight Frank’s second quarter 2009 central London office market indicates a stabilisation of the leasing market, with demand having reached the lowest point in the first quarter.
The data showed that take-up had found a floor in both the City and the West End with a number of large active searches, previously on hold due to the recession, having returned to the market.
Knight Frank said it expected activity to continue at current levels through the summer, followed by stronger growth in either the fourth quarter of this year or the first quarter of 2010.
It reported that the central London office investment market saw yields fall 25 basis points in the City and West End to 6.5% and 5.75% respectively as a result of an influx of foreign money looking to buy prime assets.
City transactions increased to £666.5m, up from £363.7m in the first quarter while transactions in the West End increased sharply to £508m, up from £262.5m.
However, it said that this had coincided with a decline in prime assets coming to the market, due to pressure on retail funds to sell assets to meet redemption deadlines easing.
Take-up in the City was above 1m sq ft, up from 730,000 sq ft in the first quarter with active searches increasing from 3.6m sq ft to 4m sq ft.
Prime rents in City offices were down £2.50/sq ft to £44/sq ft from £46.50/sq ft in the first quarter – which in real terms is the lowest for more than 20 years suggesting that City rents have moved into ‘the over-correction phase of the cycle’.
West End office prime rents also declined from £75/sq ft in the first quarter to £70/sq ft.
However, take-up in the West End increased slightly at 577,000 sq ft in the second quarter – up from 530,000 sq ft in the first quarter – with the largest deal being Youth Justice Board taking 34,000 sq ft at 1 Drummond Gate.
Active searches increased from 0.8m sq ft to 1.5m sq ft which Knight Frank expected to convert into a stronger rise in take-up later in the year.
Will Beardmore-Gray, head of City leasing, said: ‘Demand has clearly found a floor, and the market is now bumping along the bottom. In real terms current rents are at their lowest for more than twenty years and that is drawing out tenants.
‘Some big requirements have been reactivated, and I’m confident we will see some major deals either later this year or early next to boost the figures.’
Stephen Clifton, head of City investment, said: ‘Up until now foreign investors have been the driving force behind the recovery, but I see this changing in the next twelve months.
'We know UK property companies and veteran investors are building up war chests ready to return to the market. What is particularly interesting is we are seeing yields harden as a consequence of high demand and low supply.’