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OPINION

London continues to attract new tenants

London continues to attract new tenants
April 12, 2018
London continues to attract new tenants

So, in the face of a predicted migration away from London, an event that turned sentiment against investing in the London office market, the reality is that central London is alive and kicking.

In 2017 there was a net take-up of 3.7m sq ft of space in central London offices, giving life to the idea that job creation, and the subsequent need for more space, is proving to be more than enough to offset a potential loss of businesses in the wake of any final Brexit agreement. 

In fact, in 2017 leasing activity showed a significant rise on 2016, with companies entering into new leases taking the total combined space up from 5.2m sq ft to 8.9m sq ft, the highest ever recorded by real estate services specialist Cushman & Wakefield, and on a par with the take-up in 2015, long before Brexit was an issue.

Another myth gets nailed on the head with research that showed non-traditional financial services were among those most inclined to take overflow or expansion space, with tech-related companies continuing their advance on the City from north of the river. But top of the pile is the media sector, which includes the move into Cannon Street by Bloomberg.

One of the key influences here is rent. For whereas rents in the areas skirting central London such as Clerkenwell, Shoreditch and Southbank are on the rise, most relocations in central London have been achieved at more rent neutral levels.

At some point this may change, however. This can be seen from a growing supply/demand imbalance. Some property developers were naturally cautious in the wake of the referendum, and while existing developments continued to mature, the idea of additional speculative development, which means building without a tenant already signed up, took a major step back.

So, while there are nearly 260 development schemes under construction in central London, around 187 of these are residential, and of the remaining 72 offering commercial space, most of these are pre-let. And as real estate consultancy Knight Frank pointed out, more than a quarter of the development pipeline will not be available until 2020, thus creating a short-term squeeze for companies looking to move in the next two years. The supply of new space actually reached a peak in 2017, and is now in the process of falling. This is good news for existing landlords because this will increase competition for existing space and will help to underpin rents.

Another source of demand has received very little if any publicity, and that is demand from companies based in mainland Europe. Much has been written about the potential migration of companies keen to establish a physical presence in Europe, but the reverse is also true, and some European-based companies are actively considering establishing a physical presence inside the UK, should any trade deal be a major detriment to trade between the UK and the EU.

To encourage tenants to move to or expand in central London will require landlords to adopt a flexible approach to meet the tenant’s needs. This is especially important because 2.7m sq ft of leasing in 2017 was taken up by existing tenants looking to take overflow or expansion space. This trend has been influenced significantly by Brexit, with companies more keen to take on extra space in the existing climate rather than making a full-scale move into bigger premises. More than half the new entrants last year took space between 5,000 and 10,000 sq ft, and just under two-thirds of these already had operations within the UK, which means that a third of all new entrants were coming from overseas. As Cushman & Wakefield highlights, a typical new entrant was OneWeb, a US satellite telecoms company that will occupy 30,000 sq ft of office space, while 10xBanking took a lease on 20,000 sq ft of space.

With demand likely to exceed supply over the next few years, companies appear to be relatively flexible about where they locate or relocate. Rent is an obvious consideration, but transport links are equally important, with new rail links improving the attractiveness of otherwise less appealing locations. Good news for landlords with properties hugging the new Elizabeth Line cross-London link.