On the other hand, the office investment market has seen comparatively weaker transaction volumes, with uncertainty likely to have dampened the immediate appetite to transact.
Typically, occupier and investment markets are strongly aligned, however, a divergence has manifested over the last two quarters. Early data readings indicate that central London transactions are down circa 44% on the previous five-year H1 average, with investors and owners unmotivated to transact while the “fog of Brexit” remains.
The two largest leasing deals in London this year, totalling over 600,000 sq ft, were: EBRD’s new 360,000 sq ft HQ, at 1-5 Bank Street, and subletting on behalf of the European Medicines Agency 285,000 sq ft of office space to WeWork, at 30 Churchill Place, both in Canary Wharf. BNP Paribas Real Estate acted on both.
Leasing activity at Lendlease’s IQL, is also progressing well, while two 20,000 sq ft units were let to the Nursing and Midwifery Council and the Insolvency Service, demonstrating stable occupier demand for quality space. The strength in the occupier market has been underpinned by sustained, strong jobs growth (particularly in the office occupying sectors).
With the unemployment rate at 3.8%, its lowest level since 1974, the associated demand for office space has continued through the recent uptick in uncertainty.
Etienne Prongué, Deputy CEO at BNP Paribas Real Estate suggests occupier demand across the UK remains healthy, underpinning income security for investors.
“Since October 2018 we have seen an incremental increase in the risk premium on UK commercial real estate, which should encourage further capital allocation into the UK Property markets. The pound has also depreciated 5% against the US Dollar and the Euro since May alone, which is another reason why London remains an attractive destination for investment. Despite the prolonged political uncertainty, occupiers continue to commit to space in the capital; a supply-side shock to market conditions is also unlikely with the restrained level of office development in the pipeline.”
The vacancy rate in London has remained stable in H1 at 5.5%, this remains well below the long-term quarterly average of 6.7%.
Tenant demand was dominated by Financial Services, followed by serviced office take-up. The largest serviced office transaction was to WeWork at 133 Houndsditch, EC3 totalling 49,000 sq ft. Having said that, Q3 has already seen WeWork take a sublet of EMA’s 280,000 sq ft building at Churchill Place, E14 following a court ruling that EMA would be unable to exit their lease on the grounds of frustration.