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Banks hold key to City office market

Lenders holding off expansion plans as credit mess lingers

(LONDON) The difference between a correction and a major slump in London’s City office market could turn on a few key tenants such as Deutsche Bank and JP Morgan, Knight Frank LLP said on Tuesday.

But record rents were likely to hold up in London’s West End district, the haunt of hedge funds, media companies and tourists, where very low vacancy rates will continue falling, the property services firm said.

Leasing activity across London fell 44 per cent in the last three months of 2007 from the previous quarter as key tenants like banks grew nervous about a global credit crunch and reassessed their City office needs, Knight Frank said at a presentation.

How soon that nervousness evaporates will depend on the state of financial markets, and will determine how much of the UK capital’s growing pipeline of new skyscrapers is absorbed.

‘The issue is all about what has gone from active (demand) to potential (demand), and then what will go from potential back to active, and then hopefully transact,’ John Snow, Knight Frank’s head of central London offices, told Reuters.

Australia’s Macquarie Bank and South African-owned Investec INVP.L are among the firms that have recently put expansion plans on hold, accounting for just over 300,000 square feet of City demand.

More pivotal, though, could be JP Morgan’s 1 million square feet City redevelopment – a deal yet to close – and the 1.5 million square feet of office space that Knight Frank said Deutsche Bank was likely to need in the future.

Deutsche and JP Morgan are among the few major investment banks that have yet to consolidate the bulk of their London operations into a single building, having so far also resisted the lure of a shift further east to Canary Wharf.

A spokeswoman for Deutsche Bank said that its London office requirements were still under review, while a spokesman for JP Morgan declined to comment on its plans for new City headquarters.

Knight Frank said total ‘active demand’ in the City at the end of 2007 was 3.9 million square feet, which included JP Morgan, while ‘potential demand’, which included Deutsche Bank’s projected needs, was another 5.4 million square feet.

Almost 14 million square feet of office space is currently under construction in central London, according to data from Knight Frank. More than 8 million of that is in the City, of which more than three-quarters is classed as ‘speculative’ because it is not prelet.

Mr Snow said Knight Frank had adopted a ‘cautious and realistic approach’ in its projections, which saw ‘net effective rents’ in the City easing by £4.5 (S$12.50) to £59 per square foot per year after an extended period of double-digit rental growth.

City office vacancy rates were likely to rise above 10 per cent this year to 2005 levels from 7.9 per cent at the end of last year as new buildings came onstream and banks shed jobs, Knight Frank said.

The Centre for Economics and Business Research has forecast a loss of about 8,000 City jobs by the end of 2008, while data provider Experian puts the number between 10,000 and 20,000.

Knight Frank said the contrast could not be greater with London’s West End, which benefited from a more eclectic mix of tenants and a tighter control of new developments.

It said the core West End districts of Mayfair and St James would likely cement their position as the world’s most expensive office locations, with prime benchmark rents rising by 8 per cent to £118 per square foot per year by end-2009 as the area’s vacancy rate dipped below 4 per cent.

 

Source: Reuters (Business Times 7 Feb 08)

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