London Market: Average rents in the city of London fell from £60 to £45 per sq ft at the end of 2003 - but things may be looking up, says Friederike Tiesenhausen Cave.
Property investors are split on the prospects for the City of London, Europe's foremost financial centre and the UK capital's office heartland.
After a dismal three years since the market crash of 2001, they have pinned hopes on a handful of big new leases taken out at the beginning of the year.
But this week, one of the City's most respected property scouts poured cold water on the fledgling optimism by pronouncing himself sceptical of an upturn for two more years.
Michael Slade, managing director of Helical Bar, a property company that drastically cut its City office holdings after banks sacked tens of thousands of staff in 2001, said the bottom had not yet been reached. "I prefer to say that we are bottoming out and will do so over the next six months," he said.
The decline since 2001 has been steep. Average rents have fallen from £60 to £45 per sq ft at the end of 2003, according to Knight Frank, a London letting agent.
Available office space in the City, which stood at 7 m sq ft in 2001, has more than doubled to 16 m sq ft and vacancy levels stand at 15 per cent.
But there are encouraging signs. In March, British Land, the UK's second biggest property company, said Willis Group, the insurance broker, had agreed to occupy a new building in Lime Street designed by Norman Foster's architecture company.
Optimists argue that recovery after this crash will be much quicker and less painful than after London's previous property collapse in the early 1990s when vacancy rates touched 20 per cent.
According to Michael Prew, analyst at Salomon Smith Barney, the vast majority of space on offer is not on 25-year leases such as 10 years ago, but on three-to-five-year sublets offered by tenants themselves. Once economic conditions improve, these tenants will quickly move into the space themselves
Guy Napier, head of the City of London office at Knight Frank, stresses the level of inquires has picked up. "Since Christmas sentiment has shifted markedly. There have been big deals happening, which last year would have not been possible," he said.
But for the sceptics, there are also structural issues pointing to much slower recovery. Joe Valente, director of research at DTZ, the international property advisers, points to pre-letting, a practice that was popular in the City in the 1990s.
"At the time that was 'tomorrow's demand today'. That demand, which is gone, the market could do with now," he said.
Juliana Weiss Dalton, analyst at Seymour Pierce, insists any signs of economic recovery would take time to reach the sector.
"There is 12 to 15 months disconnect between the economic cycle and what's happening in real estate," she said.
Any upturn would need City institutions to re-hire thousands of workers, of which there are few signs. She said: "For 2004, rents are probably going to fall again and 2005 might see flat to very moderate growth. I think the recovery will have to wait until 2006/2007."
(Financial Times service)
