West End rents rose 25% in the last year, from £80 per sq ft to £100 per sq ft from Q2 2010 to Q2 2011, with a rise of 8.5% since Q1, thanks to the return of hedge funds to the market our Q2 figures have shown.
Our recent banking research highlighted that there would be a return to the market of hedge funds requiring small but quality floor plates in the West End. This is exactly what we are seeing and, as a result, there has been impressive rental growth in this type of space. We believe that rents will continue to rise in the West End due to limited new supply, but there are a number of speculative schemes that have started on site which may mean higher levels of activity as they complete in 2012 and 2013.
Despite rental growth, West End take up for Q2 edged down slightly from Q1 this year, as did supply. In the City, take-up was down 20% from Q1 as some larger requirements were satisfied and there was no rental growth. However supply also decreased.
It’s another below trend quarter in terms of take up in the City with the largest deals transacted all below 50,000 sq ft no doubt as a result of some larger requirements being satisfied in Q4 2010 and Q1 2011. However, Q3 looks much more positive with some large pre-lets under offer and the continued employment growth in the TMT sector has already led to major deals being done or under offer by the likes of Google, Expedia, Double Negative and Facebook. Together with vacancy rates continuing to edge down and limited new supply; I think we will again see another stronger second half to the year than the first.’
Our research also shows that Midtown had a similar Q2 performance to Q1 with 310,000 sq ft transacted and no rental growth but supply continued to constrict. In the Docklands, take-up slightly increased and rents edged up from £36.50 to £37.50 for the first time in over a year.
The real story of Q2 is that of West End rents moving up 25%. In terms of the rest of the market, there has not been a huge amount of activity, unless any unexpected large deals come through at the last minute, but supply is diminishing and with some large requirements and pre-lets still out there and a restricted pipeline, the second half of the year could be quite interesting.
Dan Bayley is head of Central London at BNP Paribas Real Estate.