UK - Investment levels across Central London fell by 66% last year and could lead to "one of the most challenging years on record" for real estate take-up in the capital, according to Jones Lang LaSalle's latest Central London report.
Jones Lang LaSalle expects London occupational levels to shrink as a result of worsening insolvencies and believes London's property investment market will not begin recovering properly until there is more availability of financing and the economy starts to stabilise.
"Volumes will remain low over the first half of 2009 although we have already started to see increased competition for prime assets and the first acquisitions by indigenous opportunity funds, always a good sign," said Andrew Hawkins, director in the City investment team at Jones Lang LaSalle.
"They will become more active later in the year as reductions in capital values decelerate. However overall, and despite reductions in interest rates, the market will not start to recuperate until the supply of money eases," he added.
Capital transactions in the City for 2008 were down 67% on 2007 levels at £3.1bn (€3.3bn), and the fourth quarter recording the lowest transactions since 1996 at £344m. The annual fall in demand across London was 31% over 2008, while annual take-up levels dropped 15% from last year.
"This downward trend in occupier activity will continue for the foreseeable future until we see some stability in the wider economy," said Neil Prime, head of office and City agency at Jones Lang LaSalle.
"New requirements will emerge but at lower volumes than in recent years and many of these will be a result of structural events, physical obsolescence or consolidation.
"However, notwithstanding this 2009 could be one of the most challenging years on record for take-up in central London. Rental decreases are forecast to last until the end of 2010, with occupiers adopting a ‘wait and see' approach where they can," he added.
Trading in the West End fell 53% in 2008 to £3bn and dropped 47% in the fourth quarter to £340m. Prime Mayfair rents in the West End fell by 11.6% to £95m per sq ft at the end of last year - the steepest decline since the recession in the 1990s, according to Jones Lang LaSalle.
George Roberts, head of West End agency at Jones Lang LaSalle, also said: "As the recession deepens, employment numbers will continue to drop and companies will release more space over the coming year. This will drive take-up down and impact negatively on rents. We expect West End rents to fall further, reaching £80 per sq ft by the end of 2010."
That said, the firm believes the strength of the euro against sterling could tempt overseas investors to buy into the London market.
Damian Corbett, head of West End Investment at Jones Lang LaSalle, said: "Foreign institutions and private overseas investors were the most active purchasers in 2008, but with foreign economies now experiencing similar recessionary problems this pool of investors will come under strain.
"However, London office property is becoming increasingly attractive to overseas investors as sterling's record low is making UK assets look cheap: the transparent trading environment is also a draw."
Jones Lang LaSalle predicts rents will begin to recover towards the beginning of 2011, once oversupply has peaked and vacancy rates subside, and will in turn provide opportunities for developers to grab potential demand for pre-lets.
Roberts claimed, however, the increase in business rates which come into effect next year might harm growth, especially in the Mayfair and St. James' regions.
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