More optimism in office sector

PUBLISHED : Wednesday, 23 March, 1994, 12:00am
UPDATED : Wednesday, 23 March, 1994, 12:00am


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OPTIMISM has returned to the office market in Britain after a three-year slump and the City of London is leading a recovery.

The Central London office market is viewed as the barometer of the British property sector and is considered by international estate consultancy Knight Frank Rutley to be well on the road to recovery.

Many principal regional centres are now emerging from the recession and entering the next upward cycle.

The recovery has been signalled by rising demand and declines in the amount of available office space.

Landlords' negotiating positions are hardening, leading to a reduction in the number of incentives being offered to incoming tenants.

Furthermore, there has been a resurgence of activity in the investment market, because the competition for the limited supply of prime properties has intensified.

Yields have fallen and this has resulted in annualised total returns reaching double digits for the first time in three years.

Availability of office space in the City of London has fallen steadily to 10 million square feet, its lowest level in four years. Vacancies are now barely above 10 per cent.

At its peak, when there was a world surplus of property, the city had more than 25 million square feet on offer.

Current demand is reflected in the attempt by an international firm of accountants to secure 140,000 square feet of office space at an uncompleted development in the City of London.

Although floors of uncompleted offices are leased and sold in Hong Kong on a regular basis, such a sale in London has not taken place since the heady days of the 1980s' property boom.

According to property agents Herring Baker Harris, most quality office space in the city will be fully occupied within the next three years.

A similar trend is emerging in the West End where floor space dropped to 1.2 million square feet in 1993 to a vacancy rate of 12.1 per cent at the end of the fourth quarter.

Confidence has also returned to the Central London office letting market where there is strong demand for high quality properties.

Take up in the city during 1993 totalled 4.7 million square feet, a major improvement on the 1992 figure of 2.9 million square feet.

Sentiment is strengthening in the Central London development market, too. There had been no new starts in the city for two years, but six schemes were scheduled to begin early this year.

The development market in the main provincial centres and on the main motorway development corridors has followed a similar pattern of recovery to the City of London, though at a slower rate.

Overseas investors have been active in the Central London office market, but the competition has increased for well-secured properties following the return of domestic institutional investors.

With the rise in asset values, market liquidity has improved.

However, the increased competition for a limited supply of prime properties in London has encouraged many overseas investors to buy properties in regional locations.

Yields are relatively attractive compared with other forms of investment and this factor, combined with low interest rates, has created a favourable climate for property purchases.

More than GBP2.73 billion (HK$31.3 billion) was invested in Central London properties in 1993, up from GBP1.63 billion in 1992.

Increased levels of investment have placed strong downward pressure on yields. For example, a yield of 7.5 per cent was quoted for 3 St James Square in the West End which dropped to 6.8 per cent following its sale to Standard Life for GBP35.5 million.