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Overview
Long-standing boundaries between central London’s property sub-markets are becoming ever more blurred.

When occupancy costs can be cut by 30-40% by moving just a couple of tube stops along the line the temptation for boardrooms to look beyond traditional core areas is becoming irresistible. It’s a trend that will accelerate in 2012 as continuing economic pain forces companies to become more footloose in their search for good value.

Space shortages within the West End and Midtown, in particular, will mean continuing spill over into areas such as Southbank and Clerkenwell which are rapidly becoming established as favoured locations for the TMT sector. Rapid growth is also likely to continue in Tech City around Old Street and Shoreditch, building on the 600 companies already established there. Other areas including King’s Cross, Stratford and Greenwich will increasingly come into their own.

London’s property market should also receive a boost from the international focus that will be on London during its Olympic year, reinforcing the growing domination of the central London office market by overseas investors. A recent Development Securities survey shows that 52% of City of London property is now owned by foreign institutions. In 1980 it was just 8%.

Key trends for 2012

• The London office map will see greater change as ‘place making’ crystallises for emerging hubs such as Farringdon, Kings Cross, Stratford and Greenwich.

• The Olympics will bring positive sentiment and reinforce London’s global appeal, bringing benefits for Central London real estate.

• 2012 will see an increased emphasis on refurbishments with more starts on site to plug the looming supply shortages, especially in the West End.

• The shake-out in the financial sector will continue in the early part of the year increasing the amount of under-used ‘grey’ space.

• 2012 will be the year the public sector starts to take decisive action to reduce costs and improve efficiency. The focus will be on operational efficiency to achieve savings first rather than a fire sale to generate revenue.

• Recent legislation allowing non law firms to offer legal services will impact on the thinking and real estate planning of the established players and stimulate demand from some new comers.

• The West End will see more pre-lets as the supply of new Grade A space falls.

A downbeat end to 2011 - with falling take-up, fewer investment transactions and increasing availability - came as no surprise against the deteriorating broader economic backdrop. With up to 200,000 jobs being shed in financial services worldwide in 2011, the City has found itself particularly vulnerable. Morgan McKinley’s November London Employment Monitor recorded a 29% month-on-month drop in available job opportunities for financial services professionals. And there is the prospect of more pain to come.

With economic growth likely to evaporate entirely, leasing markets across central London are likely to be broadly flat in 2012. However, with so many companies postponing relocation and expansion decisions a gradual release of pent-up demand in the second half of 2012 could see some improvement in take-up.
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The employment shake-out means that there is a lot of under-utilised space that exists, particularly in the financial sector, which firms are reluctant to shed for fear that they may need it again when things pick up. This so-called ‘grey space’ could remain a feature of the market for quite some time. Others are responding by postponing moves in favour of consolidation around existing sites or are looking to accommodate more staff in smaller footplates. Where occupiers are forced to make decisions due to lease events there will be a greater desire by landlords and tenants to reduce costs and risk by re-gearing leases.

Not surprisingly, many of the new starts within the Central London office market over the last six months have been refurbishments. Quicker and cheaper to turn around than new build, these refurbishments are aimed primarily at plugging the supply gap over the next couple of years. This trend towards refurbishment will continue into 2012.

The supply gap for new Grade A space looks set to be with us for a long time. The delivery of new space in 2012 will be at its lowest level for a quarter of a century. The fear now is that renewed economic weakness could see a further erosion of developer confidence, making the projected supply gap between 2013 and 2016 greater still.

Those with the confidence and resources to take the plunge into the speculative market could, therefore, reap rich rewards. Firms with a business model that enables them to move quickly in response to changing market conditions are likely to flourish in this unpredictable and volatile period.
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© 2012 Capita Symonds
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