A strong finish to 2018 sees London office market shape up for healthy 2019

Patrick Scanlon, Cushman & Wakefield.

Preliminary figures from Cushman & Wakefield reveal that the London office market rallied against Brexit uncertainty in 2018 with occupiers acquiring more than 12.1 million sq ft of space during the year; the equivalent of 24 Shards.

The full year take-up figure represents the highest level seen since before the EU referendum and is around 3% higher than 2017, and 18% higher than 2016. Forecasts for Q1 2019 are already looking strong with more than 3 million sq ft of space currently under offer.

Patrick Scanlon, Head of UK Offices Insight at Cushman & Wakefield, said: “Businesses have decided that their long-term future is in London despite the very real possibility that Brexit will dampen economic growth in the short-to-medium term. This was particularly true for tech and media firms, which represented more than 25% of all office take-up over the year. In 2019, we might expect to see occupiers pause for breath as the odds of a No Deal Brexit shorten, but the long-term outlook remains positive.”

In Q4 2018, the technology and media sector once again dominated the leasing profile, accounting for 27% of take-up across London and signing two of the year’s three largest deals. This is the third consecutive year that the sector has finished the year in the top spot.

Despite reports of banking and financial firms considering Brexit-related moves overseas, the sector was the second-largest acquirer of space in Central London in 2018, taking almost 2 million sq ft and accounting for 16% of all lettings. Take-up by flexible workspace providers accounted for 14% of total take-up.

Toby Ogden, Head of London Markets at Cushman & Wakefield, added: “Brexit headwinds have done little to dampen the appeal of London as a great place to live, work and play. It’s strong underlying fundamentals, such as the wealth of talent, convenient time zone to access both US and Asian markets and its blooming tech market are showing no signs of diminishing. I am confident that London will retain its position as one of the best cities in the world in which to conduct business and invest, well beyond 29 March 2019; with almost 10 million sq ft of pre-committed office space in the market, including Google, Apple, Facebook, Sumitomo Mitsui, Sony and Nike, it would seem that some of the world’s most influential occupiers agree.”

The availability of office space remained well below average levels. Cushman & Wakefield estimates that year-end availability will be around 12.7 million sq ft, reflecting a vacancy rate of 4.8%. This is a slight increase from 2017, but well below the long-term average level of 14.4 million sq ft.

In both the City and West End, the prime headline rent remained unchanged from its 2017 levels at £67.50 per sq ft and £110.00 per sq ft respectively.

Furthermore, preliminary data from Cushman & Wakefield’s London Markets team reveals that the London office investment market is in rude health. Turnover reached £19.7 billion for the 2018 full year, only marginally below the levels recorded in 2017 (£20 billion) and well in excess of 2016 (£16.1 billion); demonstrating the resilience of London as a global target for commercial real estate investment, despite Brexit headwinds.

While Asian investors accounted for 39% of all turnover, UK domestic investors also showed signs of becoming more active in 2018, accounting for 24% of all purchases compared to 18% in 2017.

The prime yield in the City remained stable at 4%, while in the West End Core the prime yield softened by 25 basis points to 3.75%.

Martin Lay, Co-Head of London Capital Markets, at Cushman & Wakefield, said: “We are seeing a broad and deep cross section of investors, including a weight of capital from Singapore, South Korea and Hong Kong, actively target London as they strongly believe in the positive long-term outlook for the city. A strong occupational market has helped to drive investors up the risk curve and diversify beyond prime stock into new locations and developments, which further demonstrates the continued strong appetite for London investment stock. We are anticipating a strong pipeline of new transactions in Q1 2019.”