EUROPE - Weak tenant activity stalled the central London office market in the second quarter after 18 months of relatively strong lettings, according to data published by Capita Symonds, a consultancy.

The report's authors attributed the weak tenant figures to a slowing world economy, the impact of higher oil prices and the euro-zone crisis.

The report added: "All this makes businesses reluctant to move, invest or take on new staff, with direct knock-on effect on the office market."

However, its authors also pointed out that much of the past two years' upward-trending activity had been the result of tenants taking advantage of landlord incentives to move.

Second-quarter take-up fell by 22% over the previous quarter in central London and by 9% in the West End.

Yields in the City remained static at 5.25% for the fifth consecutive quarter, despite office investment increasing to £1.35bn (€1.5bn), compared with less than £1bn a year ago.

Rental values increased by 4% over the same period.

In the West End, yields on prime remained at 4.5% for the sixth consecutive quarter. Rental values increased by 7% over the year from June 2010.

Despite the prospect of yet more limited supply - the report forecasts the completion of new assets in the City and West End will be at a "historic low" in 2012 - demand will continue to be patchy.

Specifically, the established pattern of high demand for prime assets and weak demand for secondary will continue as a significant market feature.

In the City, the first two quarters of 2011 saw ground broken for schemes covering 1.4m square foot - a response to the limited supply of prime office.

New supply will peak in 2014. Until then, overseas buyers scouting trophy assets as a safe haven for cash will continue to exert downward pressure on prime yields, the report said.

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