London office rents to soar further ahead of European counterparts over next four years

By James Wallace - Friday, August 28, 2015 13:47

Rents in the London office market, the most expensive in Europe, are forecast to climb 5% per annum over the next four calendar years outpacing rental growth in other major European cities and widening the gulf to record levels, according to DTZ.

London office rents are forecast to increase at an annual rate of 5% in the Midtown, 4.9% in the City and 3.6% in the West End until 2019, predicts DTZ. 

London West End is by far the most expensive European office market with a prime value at €1,167/sq m per year in Q2 2015, driven by strong competition from the finance sector and a very low availability ratio. 

Magali Marton Head of EMEA Research at DTZ, said: “Although London is already the most expensive European office market, there is still room for further increases. Indeed, rental values in the UK capital are forecast to increase at an annual rate of 5% in the Midtown, 4.9% in the City and 3.6% in the West End until 2019.” 

The European office rental market continued to strengthen in the second quarter of 2015 as take-up volumes reached 3 million sq m.

Marton added: “The gap between London and other European markets has reached record levels. Indeed on a square metre basis, Europe’s next most expensive markets, Geneva, Zurich and Paris cost less than half of London West End figures. The story is quite different in Dublin where the strong increase in prime rental values shows recovery after a sharp decline during the crisis.” 

On average, rental values across Europe have increased by 1% over the past 12 months reflecting the growing imbalance between a recovering demand and a lack of qualitative supply amongst European cities. Both Dublin and London (West End) have seen prime values soar by 23% and 12% respectively, according to the research report.

At the other end of the scale, Moscow and Kyiv rental values are severely tumbling, by 21% and 25% in one year. Moscow, which was one of the most expensive places in the European office market at the end of 2013, with a prime rental value at €1,167/sq m/yr, lost almost half of its value in 18 months with a prime rental value at €673/sq m/yr at the end of Q2 2015.

Greater Paris Region remains the largest European office market in terms of leasing activity with 542,500 sq m of take-up in Q2 2015, a sharp rebound after a subdued Q1 2015 with 372,000 sq m let. London comes second with 331,782 sq m let in Q2 2015.

The finance sector accounts for this as the main market feeder, especially in the West End and the Emerging Markets. Budapest steps on the European podium in terms of office letting activity for the first time, with 213,000 sq m leased in Q2 2015. This was boosted by several large pre-lease deals involving major telecom companies.

Vacancy ratios are decreasing across the board in Europe, with the regional average standing at 10.5% at the end of Q2 2015, down from 10.9% in Q1 2015. 

Over the past 12 months, the biggest declines in vacancy rates have been recorded in the UK with London leading the way (-28% in one year) followed by Birmingham where the vacancy rate declined by a quarter over the past year.

jwallace@costar.co.uk

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