In late 2014, real estate analysts anticipated that the UK office market would deliver a healthy performance during the 12 months that were to follow. In line with their predictions, steady recovery was the predominant theme across many European office property markets, and London remained at the top of the best-performing cities list, along with Stockholm, Dublin, Madrid, and Barcelona. The British office market is now heading into 2016 with confidence amid a generally positive economic climate. This article provides a summary of the performance of UK office market during 2015, a forecast of the key trends for 2016, and a review of how key UK market indicators fare in comparison with other global markets.
Key Office Market Trends for 2015 across the UK
Demand across the British office market has remained robust, especially in established sub-markets like London, Bristol, Reading, Sheffield, Manchester, and Liverpool. This stands in contrast with other European markets, which have experienced a slow down with regards to occupier demand over the past 12 months.
An increasing shortage of prime office space in core sub-markets, which is expected to continue as forecasts for the 2014-2016 period predict that new supply is only expected to account for 2.5% of the UK’s total office stock.
Linked to the above, 2015 saw a significant amount of overseas capital pouring into office markets other than London. Limited supply has spurred a growing interest in both prime regional and secondary markets like Newcastle, Nottingham, and Cardiff.
Pre-lease agreements have made up for a significant amount of new development take-up rates. Similarly, during 2015 the UK office market experienced a rise in pre-let contracts, with more than 3 million square feet being secured under this type of agreement.
Strengthened occupier activity has been driving rental growth rates that averaged 2.2% nationwide. Rental growth rates were higher for Central London offices (3.4%) and for offices in the South East (2.1%).
The Main Things the UK Office Market Will Benefit From in 2016
According to the British Chambers of Commerce, during 2016 the UK’s output growth will reach 2.6%, a figure that is markedly higher than the global GDP projections for Western European countries, set at 1.75%. This is expected to have a positive impact on the UK office market at large.
Sectoral growth in the creative, media and tech fields is expected to keep putting upward pressure on rents and driving vacancy rates to new lows. In particular, the creative sector has become the country’s fastest-growing industry, and many companies involved in creative activities are looking to expand and move to new office premises. Moreover, the resurgence of the banking and financial sectors, along with increasing employment rates in these industries, are also likely to benefit the UK office market during the next 12 months.
By the end of 2016, rental growth rates are expected to be 4% higher than the past 10-year average. This will clearly benefit landlords and investors who have assets in core UK office markets.
- A positive consumer sentiment bolstered by low inflation rates and an above-average score in the latest Optimism Index are likely to encourage business investments and drive further growth across the strongest regional office markets.
Office Vacancy Rates 2016
Western European Markets
Munich: remarkably low at 5.7%
Stockholm: declining vacancy rates that hover around 7.5%
Zurich: solid economic growth to drive rates down to 6%
Lisbon: stable at 9.6%
London: declining at 6.9% for offices in the City
Luxembourg: just above 6.2% and expected to decline further
Madrid: down to 10% thanks to a strengthened local economy
Amsterdam: decreasing to 15.7%
Barcelona: down to 9.5% following a modest improvement in economic indicators
Brussels: stable at 10.7% and marked by modest demand
Dublin: one of the strongest performers in the EU, with rates down to 9.6% from an all-time-high of 22% in 2010
Frankfurt: despite the deceleration in employment and export growth, rates remain low at 9.8%
Eastern European Markets
Bratislava: relatively unchanged at 11.9%
Bucharest: down to 10.8% and characterised by an overall positive performance and growing demand from the ICT sector
Istanbul: slowly declining but still high at 21.7%
Moscow: a complex market under macroeconomic pressures that have brought the rates up to 19.4%
Warsaw: marked by oversupply with vacancy rates of 17.4%
Class A Prime Rents 2016
Amsterdam: 30.80€ m2 / month
Bratislava: 15€ m2 / month
Brussels: stable at 23€ m2 / month
Bucharest: nearing 19€ m2 / month
Budapest: 21€ m2 / month
Dublin: 40€ m2 / month
Frankfurt: 37€ m2 / month
Istanbul: 41€ m2 / month (rates are capped by a substantial development pipeline of nearly 2 million square metres)
Lisbon: stable at 18.50€ m2 / month at least until end of the current year
London: 72.4€ m2 / month across the city, higher for “super-prime” rents in the West End (173€ m2 / month)
Luxembourg: approaching 45€ m2 / month
Madrid: edging towards 25.50€ m2 / month
Milan: just under 39.50€ m2 /month
Moscow: 61.50€ m2/ month (half of what they were in 2008)
Munich: 33.50€ m2 / month
Paris: 62.50€ m2 / month
Prague: unchanged at 19.50€ m2 / month
Stockholm: on the rise at 44€ m2 / month
Warsaw: unchanged at 25€ m2 / month and decreasing for the next 2 years
Zurich: 62.6€ m2 / month