Outlook

The fundamentals of the central London office market remain strong. Following three years of above average demand, we were always forecasting take-up to return to more normal levels in 2016 and the EU referendum decision only served to reaffirm this. However, take-up defied expectations in both the West End and City in the second half of 2016 and has continued to do so in 2017. Similarly, availability remains considerably below the long-term average. We are also yet to witness any significant decline in headline rental levels, although there has been a reduction in net-effective rents as incentives have increased.

Market indicators suggest a strong second half of 2017. Under-offers and active requirements are significantly above the long-term average, while the high level of pre-letting has minimised near-term speculative deliveries meaning vacancy rates should remain relatively stable.

Looking beyond 2017, the performance of the central London office market is highly dependant on the terms Britain agrees when leaving the EU and the impact this has on the ability of businesses to operate in Britain and the EU.

As has been much publicised, the banking sector will be the hardest hit by Brexit and banks are beginning to finalise plans to move some functions to the EU. However, banks will clearly need to retain a significant presence in the global financial centre that is London. Deutsche Bank's recent pre-let of circa 564,000 sq ft at 21 Moorfields, EC2 on a 25-year lease provides a clear example of this.

While we are likely to witness a reduction in the Banking sector's London footprint, the Tech & Media sector continues to drive take-up across central London. This is certainly not a new trend in the West End, however, it was encouraging to see the sector was the most active business sector in the City in the first half of 2017. Since the Brexit referendum vote there are numerous examples of some of Tech & Media's leading firms reaffirming their commitment to the capital. These include Apple pre-letting 500,000 sq ft at Battersea, Google pressing ahead with the construction of its 800,000 sq ft European headquarters at King's Cross and Amazon exercising their option to acquire an additional 175,000 sq ft at Principal Place, taking their occupation to 630,000 sq ft in this location.

The greatest risk to future take-up levels is any restrictions imposed on immigration which could potentially restrict London’s labour pool, resulting in skill shortages that could lead to businesses locating elsewhere. However, Amber Rudd's recent statement that "The UK must remain a hub for international talent. We must keep attracting the brightest and the best migrants from around the world." suggests the government will seek to address this issue. Furthermore, Oxford Economics forecasts Greater London’s office based employment to consistently grow over the next nine years which bodes well for future take-up levels.

^{Source: Oxford Economics}

A sharp recovery in the value of the pound appears unlikely in the near future. This should ensure that London property continues to look comparatively cheap to many non-domestic investors and as such we expect international investors to continue to dominate and investment volumes to remain at above average levels. There will continue to be particularly high levels of demand for high quality space and income.

With the current dominance on international investors, a clear risk to the market would be any shock that causes a reduction in their demand. However, we understand several UK private property companies and REITs who are now highly liquid following their recent sales, are waiting for value opportunities to present themselves. As such, if any shock were to occur that dampened international demand causing a softening in yields, we would expect the domestic institutions to re-enter the market.

^{Source: Savills Research}

^{*Rental tones based on typical 5,000 - 10,000 sq ft floor, Grade A, non tower, no terrace.}