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Occupiers to remain reticent across the Capital during 2009

While Investment Values fall 66% on 2007 values

London, 21st January 2008 – The onset of recession has accelerated the downturn in the Central London occupational office market with demand falling 27% in Q4 2008, according to Jones Lang LaSalle’s latest Central London Report. The annual total take-up of 10 million sq ft was 15% behind 2007 levels while the annual fall in demand across London was 31%, which pushed the market to levels not previously seen since 2005.

Neil Prime, Head of Office and City Agency at Jones Lang LaSalle, said: "This downward trend in occupier activity will continue for the foreseeable future until we see some stability in the wider economy. 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. Thereafter we expect to see rents’ beginning to recover as the oversupply in the market is eroded and vacancy rates begin to reduce."

Overall demand in the City at the end of Q4 stood at 7.8 million sq ft, a 25% fall on Q3, while the annual reduction was 36%. In the West End total occupier demand fell by 16% to 4.9 million sq ft in Q4 2008, while just under 625,000 sq ft was let representing a 9% decrease on the previous quarter and the weakest final quarter since 2002. Over 2008 active demand in the West End fell by 57% and the annual total take-up of 3.2 million sq ft was a 30% reduction on 2007.

As a result of these significant falls in demand, and the release of surplus space to the market, Jones Lang LaSalle predicts that prime headline rents in the City will reach £50 per sq ft by the year end, and £47.50 per sq ft by the end of 2010. In the West End, prime Mayfair rents fell to £95 per sq ft at the end of 2008. This represented a quarterly reduction of 11.6%, the sharpest drop since the 1990s recession.

George Roberts, Head of West End Agency at Jones Lang LaSalle, commented: “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. A recovery period will begin at the start of 2011, however growth may be tempered by the increase in business rates which will come into effect in 2010 and hit Mayfair and St. James’ particularly hard.”

The development pipeline has halted across Central London and once supply has peaked large occupiers will struggle to find accommodation in the built environment. Opportunities will arise for developers to seize this potential demand for pre-lets. While current development market fundamentals do not support pre-letting at market rents, with commodity prices falling such fundamentals are quickly changing and could support a return to construction.

Investment levels across central London for 2008 fell to £6.3 billion, a 66% fall on 2007, while the £949 million traded in the final quarter was the weakest since 2002. In the West End £340 million was traded in Q4; a 47% fall on Q3 and the annual total of £3 billion was a 53% reduction on 2007. Capital transactions in the City totalled £344 million in Q4; the weakest quarter since 1996, while the annual £3.1 billion total was 67% down on 2007.

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. Debt is unlikely to become available in any meaningful capacity, and high net worth individuals with favourable banking relationships will be best placed to borrow”.

Lead Director in the City Investment team at Jones Lang LaSalle, Andrew Hawkins, concluded: “Purchasers over the coming year will be naturally focussed on covenant quality and an asset’s income generating characteristics with yields likely to continue to move out as tenant insolvency impacts on the market. 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. 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.”