London commercial property market
We started 2011/12 expecting to see a limited supply of new office space coming onto the market, with demand around average levels. We ended the year with both supply and demand at lower levels than those forecast.
On the demand side, wider economic uncertainty impacted confidence and, in turn, requirements for space. Some occupiers requiring new accommodation chose to delay their moves. On the supply side, many developers found it difficult to raise the capital needed to advance developments. Others remained wary of making investments. Local Authority spending cuts and localism have also added complexity to the planning process in London.
Meanwhile, London’s qualities as a leading financial and commercial centre continued to attract investors from around the world. As a result, the property investment market remained liquid throughout the year.
We remain consistent in our view that supply-constrained conditions will lead to rental growth, although these conditions are taking longer to emerge. The supply of prime office space will be significantly limited by the hiatus in the development market and we expect demand for the right space in the right location to increase as pent up demand is released. Our portfolio is positioned to take advantage of this.
We continue to see an imbalance between supply and demand for high quality space in the medium term. Supply-constrained conditions are emerging slower than we expected this time last year, but we expect them to remain for longer as forecasts for the supply of new office developments were cut substantially during the year. A significant proportion of existing stock is unsuitable for the contemporary needs of occupiers and there is a higher than normal level of lease expiries due from 2013. This combination of factors will mean companies with office requirements will find they have less choice.
To put this in context, long-term average take-up of Grade A space in central London is 6.3m sq ft per annum. The take-up in 2011 was 5.5m sq ft. The combination of current Grade A vacancy and forecast development completions which are not pre-let will only provide in the region of 4m sq ft per year in 2012, 2013 and 2014. Tall building developments in the City continue to attract media attention, but the current development commitments will make only a modest contribution to total floorspace.
Central London’s residential and retail markets remain strong. London is the only city in Europe that can claim to meet the prerequisites for a truly global city – high quality of life; exceptional business infrastructure; a strong talent pool; excellent access to markets; good communication links; and a clear and reliable legislative framework. Uncertainty elsewhere serves to underline London’s enduring strength as one of the world’s most dynamic and successful cities.
Against this background, we will build on the advantages gained through re-starting developments in London first. We have an attractive mix of high quality assets with strong revenue streams. We have a clear plan for every asset and a pipeline of projects that will add significant floor space through development. We are well positioned.