Published July 10, 2008

Property demand strong in London's West End: report

(LONDON) Demand for space in the world's most expensive office location, London's West End, remained strong in the three months to end-June, even as takeup in the nearby City financial district sank, a report said yesterday.

Property services firm Knight Frank said office takeup in the West End in the second quarter was broadly in line with year-ago levels and about 30 per cent up on the first three months of 2008 at 1.4 million square feet (130,100 sq metres).

'The fact that a year after the (outbreak of the) credit crunch we are still seeing rents in excess of 100 pounds per square foot and a robust level of take- up demonstrates the West End's resilience,' Tim Robinson, a partner in West End office agency, at Knight Frank, said in a statement.

The West End area of central London includes the hedge fund haunts of Mayfair and St James' and most of the UK capital's tourist attractions and is characterised by low-rise buildings due to strict planning guidelines.

That has tended to limit the potential supply of new office space and underpinned rents, although office markets in non-core areas of the West End such as Victoria, Paddington, and Marylebone are increasingly being developed.

James Roberts, Knight Frank's head of central London research, said in the statement a large letting deal with retailer Marks & Spencer had boosted the West End's second quarter office takeup but that demand from financial firms was holding up.

'Not as many fund managers have vacated offices post-credit crunch as initially feared, and a surprising number are still taking space,' he said, citing a 38,000 square foot deal involving hedge fund manager Brevan Howard Asset Management LLP.

Newspaper reports in April said Brevan Howard was mulling a move to Switzerland for tax reasons.

Knight Frank said 5.1 per cent of West End office space is currently vacant, up from 3.8 per cent a year ago.

In contrast, the office vacancy rate in the City was 8.5 per cent, compared with a low of 5.8 per cent in the third quarter of 2007, it said.

The two markets are historically correlated but the City is a more volatile market and is tipped by analysts to lead a sharp downturn in UK office rents.

Knight Frank declined to provide forecasts but other property services firms have said that the City office vacancy rate is likely to rise above 10 per cent as financial job losses mount and new office schemes come on stream.

According to Driver Jones, almost 11 million square feet of office space is under construction and available to let across central London - a large majority of that is in the City and most is scheduled for completion in 2008-2009.

Knight Frank said office takeup in the second quarter in the City market fell by 30 per cent to 1.1 million square feet, compared with the previous quarter, and was 60 per cent down on the same period of 2007.

Shares in West End property specialists such as Great Portland and Derwent London have fallen by more than 30 per cent so far this year - slightly more than leading City office developer British Land.

According to analysts at JPMorgan, the three are trading at discounts of 34-37 per cent to their expected end-2008 net asset value. -- Reuters