Central London office investment is on track to record notably low volumes in the third quarter but a positive shift is taking place, with the number of buildings under offer lifting strongly.
On the occupier side, the slower speed at which transactions are completing alongside a looming UK Budget and US General Election is tempering expectations of a bumper end to a year that has seen robust take =0up.
That is the house view of Cushman & Wakefield and its senior London advisers.
Cushman & Wakefield head of London offices capital markets Martin Lay says the market is at a "crossroads moment and it will be a very interesting final quarter".
"People should not get too hung up on the Q3 stats which we are expecting to be low. It is not what it is feeling like in the market. You can understand it in that it is the summer and sentiment has led a lot of people to choose to avoid processes, but there has been a strong pick-up in buildings going under offer."
Cushman & Wakefield reports that in the second quarter just over £1.7 billion was traded, similar to figures seen in the third quarter of last year. By the second week in September there had been £650 million transacted in the third quarter it reports.
"Even with some of the visibility we have on deals nearing completion, it is unlikely anywhere near the remainder will be made up to get to those prior quarters," Lay says, "so on the face of it activity has fallen across central London. It could be seen as a negative story but the important point is under offers are increasing strongly."
Cushman & Wakefield reports that as of 1 June this year £700 million was under offer across central London but as of 10 September there is £1.54 billion under offer. The figures have more than doubled over three months. "That is a good way into what we are expecting to be an active Q4," says Lay. "Some of those deals will close before year end and provide a better feel of the market."
The West End has seen liquidity return fastest, says Lay. "This quarter of the £650 million that completed the top three are all in the West End. The City is following."
Those deals were Chinese Estates sale of 14 George Street, Von Finck Group's acquisition of 24 Savile Row, as revealed by CoStar News, and JP Morgan's acquisition of 291 Oxford Street.
Lay points out that of the sales that launched in the third quarter so far, of circa £1.1 billion there is a swing to the City, skewed by Brookfield bringing out Citypoint Tower. Of the £815 million that has gone under offer in the third quarter July saw most activity, Lay says.
In August Cushman & Wakefield saw £110 million go under offer and now £173 million is under offer in September. "We are in a market where there is some increased improvement in sentiment."
There are also some new buyers although in general it is a similar type of capital - private equity and private investors - Lay says. The rumoured return of UK real estate investment trusts such as GPE, which CoStar News revealed is under offer to buy Whittington House in Bloomsbury for in excess of £70 million, and institutions such as L&G is improving sentiment.
Lay says that important in aiding sentiment is the strength of the occupational market and the opportunity to deliver the right quality buildings in terms of returns. "The market has underestimated how strong rental growth was going to be giving investors confidence and of course the interest rate curve is on its way down. A stronger government has been well received by investors given the more recent history too."
Take-up wise, head of the London leasing business Andy Tyler describes the market as being at a really interesting point. "It really is a case of is your glass half full or half empty as there are quite a few contrarian pointers that would influence what you decide upon."
Tyler says that in September there is always enthusiasm about the last three to four months of the year and focusing on getting those deals done in summer that held over.
"We do have that feeling of a final quarter that will be positive because of the pent up piece from summer. But I personally think we will have that hockey stick but may it not be as severe as previous years. We have a Budget in October from a domestic perspective and the US elections in November from an international perspective. As a decision maker you may want some visibility on that. If you could sit on the fence a bit longer you might want to do that."
Tyler says deal velocity has been very slow in the summer when it comes to getting them over the line. "There will be an uptick this quarter but I suspect it won't be sufficient to get to the take up numbers of 2023 which were good."
Cushman & Wakefield is recording 5.2 million square feet of take-up at present for the year, a touch behind 2023 at the same time. It recorded 9.6 million square foot of take up in 2023 in total and is tracking around 3.4 million square feet under offer.
From a supply perspective there is positive news. As at the end of August, there is 26.7 million square feet of pan London supply, the same number as a year ago.
Tyler says this could be good news. "Have we therefore peaked and therefore are we going down the other side of the slope as take up continues? We are going into a tighter supply pipeline. An interesting piece of take up we have seen is 70% of take up is for Grade A. We know we have a lot of supply and the vacancy rate across London is about 9.2% but if you know the majority want Grade A space it's about 5%. And in some submarkets there is very little supply. Does it mean rents go up - yes - and occupiers may be forced to look into other submarkets."
Tyler says there have been summer highlights with BDO leasing 223m000 square feet in the second biggest this year at, and Monday.com taking 80,000 square feet at One Rathbone Square in a letting revealed by CoStar News.
"To get those through during the summer is great, and there are more coming. There is 3.4 million square feet under offer which is13% higher than the five yearly average so we are trending in the right direction."
In terms of the bigger picture around how much office space corporates will ultimately want Tyler says the market is getting more insight.
"Interesting now is the dynamic of what would be the horizon generally for people looking ahead. Typically it has been anything from now until three years hence but now some of the big movers are looking a long way ahead out to 2030, especially if taking a prelet or something.
"With a backdrop of supply coming down and a more restricted development pipeline, the better quality buildings will command higher rents and logically we will see an increase in preletting."