The central London office market will be hit by a vacancy level peak of 12.1% by the end of the year before emerging from the downturn next year, according to Knight Frank.
At its central London breakfast this morning the property services firm said central London availability would peak this year at 27 m sq ft, before falling by 36% from early 2010 to the end of 2012.
Take up will fall to 7m sq ft in 2009, then will begin rising again next year, recording an average increase of 27% a year between 2010 and 2012.
Rents in central London are forecast to fall further this year then rise in 2011, while any early recovery will begin next year as availability starts to fall due to fewer development completions and an improving economy.
William Beardmore-Gray, partner in central London leasing at Knight Frank, said: ‘Central London is now 18 months into the downturn and we forecast 2009 to be the eye of the storm. There is structural demand in the West End and the City which now requires the right conditions to be activated. Incentives are peaking and will start to fall in 2010. Central London rents will continue to fall for 18 months as supply peaks at the 2003 level of 12.1%. We forecast a return to rental growth will return in 2011.’
Knight Frank said that the Central London office investment market is showing relative value to other European markets because of the rapid correction in pricing in the UK as well as the currency fluctuations. This scenario is likely to attract interest from private buyers, albeit there will be more limited demand for larger lot sizes.
On the medium-term outlook, Knight Frank predicted that from the second half of 2thsi year speculative and recovery play investors will enter the market, in order to pre-empt the economic recovery and take advantage of the over-correction in prices. It said that the property market could also benefit in the medium-term from investors seeking a hedge against higher inflation.
Ker Gilchrist, partner in central London investment at Knight Frank, said: ‘London offices as an investment are seen as offering value in relative terms set against other global business centres, and while values may have further to come off, the market is clearly further down the line in the process of re-pricing in the face of recession. London also benefits from offering a transparent real estate investment market.’
Prices in the prime Central London residential market are likely to fall by 30% from peak to trough in a process which should be completed by mid to late 2009, said Ian Marris, partner in the London residential development team at Knight Frank.
He also forecast that prices in the super-prime residential market will rise from 2010 as stronger demand meets lower supply levels.
‘The super prime residential market has seen weaker demand in the last six months, however with prices now below peak levels, together with the falls in Sterling, demand is likely to now grow towards the end of 2009. We anticipate a return to growth in 2010 as low supply levels become critical,’ said Marris.