Cheaper domiciles and lower staff costs overseas may tempt British businesses to shift operations
Take-up in central London's office market could reach a record low this year, amid fears that businesses are leaving the British capital for less expensive locations overseas, analysts forecast.
Other data shows the decline in the city's office rents is slowing, signalling the recession is ending.
According to Jones Lang LaSalle's second quarter Central London Market Report, take-up was a paltry 2.6 million square feet in the first six months of the year.
With only a further 1.2 million sq ft under offer at the end of the second quarter, the property consultancy warns 'it is possible that 2003 may fail to keep pace with the [6.4 million sq ft] achieved in 2002, which was the lowest since 1992'.
Derek Epstein, director of Jones Lang LaSalle, said that if take-up this year undershot 1992 and last year's levels, then it would be the lowest since the agency started to keep records in 1984.
The supply and demand imbalance caused by cutbacks in London's financial services industry pushed down central London Grade A office rents 10 per cent in the first six months, the agency reports.
'In the City and Canary Wharf the financial services sector expanded too fast in the late 1990s and 2000. They are all shedding space now,' Mr Epstein said.
He forecast rents would fall 15 per cent next year. Fears have grown over the summer of an exodus of firms from London.
Market analysts, India Property Research, forecasts 15 million sq ft of British office space will be vacated by firms moving to the Indian subcontinent within the next five years, 30 per cent of this being lost in London. Deloitte Research forecasts that up to 300,000 British jobs will be lost to India where labour costs are lower.
A Mori poll conducted on behalf of the Chartered Institute of Management Accountants found 60 per cent of businesses will leave London in the next 15 years to avoid rising costs, unreliable transport and the threat of terrorism.
The government wants 20,000 civil servants moved to the provinces. However, analysts believe London will recover its popularity.
Mr Epstein said: 'There has been a lot of talk of relocating back offices outside Britain in the past, but this move has never really materialised. All thoughts of being thwarted by Frankfurt have not happened. 'London has the skills, culture and lower employment costs than other major centres.'
Richard Holberton, associate director at CB Richard Ellis, said London's short-term cyclical weakness ought not to be confused for structural problems.
'In the mid to long term, there are certain key issues, such as transport infrastructure and housing, which will have to be improved to ensure London remains competitive vis a vis other major cities in the world, and the government seems to be dealing with those,' Mr Holberton said.
CB Richard Ellis reports the worst of London's downturn may be over, because the rate of rental decline has slowed.
According to its September Monthly Index, the annualised rate of decline in rents slowed to 14.3 per cent last month compared with 22.1 per cent in July.
Mr Epstein agreed the first signs of recovery were appearing, because financial services firms were starting to recruit staff again. Rents would rise in either 2005 or 2006 when surplus space was absorbed and the economy began to improve as forecast, he said.
Robert Hadfield, analyst at website residentialinvestoralert.com, said the effects of the downturn in the commercial sector on residential was neutralised by other events.
'The trend is down but not disastrously down, not a huge impact immediately. There may be fewer US executives coming to London, but there are lots of Kosovan refugees and they all need somewhere to live.
'London may be a world city influenced by world events, so some people at the top may come and go but those in the middle and bottom will always be here.'