I’m a month into Q3 now and, with a dozen or so London office outlook presentations to clients under my belt, this is a good time to take stock: what are our clients worried about?
Two main things have stood out: occupier demand and the future direction of yields. Even if demand numbers remain static, how willing will occupiers be to actually sign up? Latent demand does not always mean leasing activity and although our demand statics were more or less unchanged on the quarter, we have seen the conversion rate of requirements to deals decline. How confident are occupiers in their medium term accommodation needs? Volatility equals uncertainty equals hesitancy. Hopefully this is will prove to be a short term issue coinciding with the seasonally quiet summer months but all economies are on a close watch. We’re no double dip merchants but risk – or the anticipation of risk, which is almost the same thing – has certainly increased.
Then onto yields. Yield compression has pushed capital values up 30% year on year and now rental growth has taken over as the driver. Expectations for rental growth should lead to further compression – but many feel the prime yields will now stabilise and some would not be surprised to see some expansion. Could we really have three years of double digit rental growth and flat yields? I believe the majority of yield compression witnessed in 2009 was driven by supply and demand imbalances in the investment market, with rental expectations a secondary driver. With yields already well below long term averages and a greater balance in investment demand and supply emerging I think the answer is yes.
Have a look at our latest Central London Market report!