Our latest report covering Central London Office Activity.

Avison Young today released its latest report covering Central London Office Activity. Total take-up fell to 1.1 million sq ft in Q2 2020, which was 49% below the previous quarter and 57% below the 10-year average.

The largest transaction of the quarter was to BP at Cargo, E14 where the oil and gas giant took 205,000 sq ft, after having been under offer for several months prior to COVID-19.

The following months could see some change as the real impact of COVID-19 on the economy sets in and occupiers potentially reconsider their space needs. Several companies are taking the opportunity to conduct a strategic review across their occupational estate with a temporary reduction in occupancy expected in some cases. The pandemic has changed the priorities of both investors and tenants when it comes to making real estate decisions. It is also expected both will place a larger emphasis on health and wellbeing when considering the pricing and take-up of office space, moving away from purely a focus on size and location.

Meanwhile, the flexible office sector is under immense pressure with consolidations imminent as the lockdown has had a huge impact on occupancy levels. However, flexible office operators are well placed to provide ‘ready-to-go’ space to pick up on potential demand from displaced occupiers. Some operators are considering hub and spoke fringe or suburban London locations to attract tenants looking to reduce staff presence in their head office, and to take advantage of what is likely to be a hesitant return to regular use of public transport.

Prime rents and rent-free periods have stayed fairly stable across Central London for Q2 2020. Headline prime rents currently stand at £72.50 per sq ft in the City, £115.00 per sq ft in the West End and £45.00 per sq ft in East London.

Nick Rock, Principal, Central London Offices, said:
“We are now starting to see increased levels of new enquiries and rekindling of requirements which were previously put on hold. This will hopefully translate into increased take-up activity in the second half of the year. COVID-19 will undoubtedly impact short-to-medium term office activity, but we believe the Central London market remains attractive to occupiers and investors alike.”

Investment volumes for Q2 2020 reached £682 million, 81% down on the long-term average. Although volumes for Q2 were amongst the lowest on record, they were comparable with the low point of the Global Financial Crisis in Q1 2009, and the dot com crash in Q1 2002, when volumes reached £840 million and £777 million respectively.

Lower transaction volumes in Q2 were evidently impacted by purchaser uncertainty, while a lack of stock on the market mainly driven by COVID-19-imposed travel restrictions also contributed to a slowdown in investment volumes. However, as lockdown measures and quarantine restrictions begin to ease, the market is starting to see increased momentum.

June saw a considerable improvement on the earlier months accounting for 58% of the quarter’s activity alone. July, so far, has seen further activity and there is therefore good cause for increased sentiment and optimism.

Whilst most Q2 transactions have occurred off market, an increase in market activity over the coming months is expected, with a number of trophy sales earmarked for wide sales campaigns during the final quarter of the year.

Overseas purchasers made up a record 92% of investment by total transaction volumes for Q2, from which two of the top three largest deals involved Asian purchasers. Examples include the sale of 20 Farringdon Street, EC4 to Tenacity Group for £120 million and the sale of 10 Fenchurch Street, EC3 to Hong Kong based Retain Prosper Ltd for £94 million. Procession House, EC4 which was the largest sale of the quarter, was completed by Union Investment Real Estate, a German investor, for around £139 million, as they had exchanged prior to lockdown.

The start of Q3 has shown reasonable signs of recovery, the easing of restrictions and greater certainty about the future has so far enabled a rebound to the investment market. There have so far been five completions in Q3 to date, totaling £366 million.

While prime income stock remains in high demand, we do not expect to see any major movement on yields in the short term.

Chris Gore, Principal, Central London Investment, said: “Vendors with prime assets, or assets with long income, are prepared to trade at or close to pre-COVID-19 levels of pricing and there are a number of Asian investors who are capitalising on the lack of investor demand from elsewhere, in addition to the paucity of debt and favourable exchange rates to acquire deals. Value add assets with short term income have also seen resilient demand during the crisis while medium to longer term occupational market fundamentals remain attractive in London.”

You can view our latest Central London Office Analysis report here.