Central London Net Effective Rents Monitor Q1 2022

Trends by submarket

The recovery in rental levels has not occurred evenly across central London, and has been focussed on prime locations in the West End, Midtown and South Bank sub-markets, where low levels of grade A vacancy mean that tenants are increasingly competing for the best available space. Consequently, rent free periods have contracted typically by 3-4 months over the last year for a 10 year lease. 

In contrast, in the City of London, east City fringe, London Docklands and West London submarkets, vacancy levels still favour tenants (except for the upper floors of some of the more prominent City tower buildings). This has resulted in a lower rate of change in rent free period incentives for prime space, which have contracted by typically 1-2 months in the City of London (although up to 3 months in some City fringe locations such as Farringdon) and circa 1 month in the Docklands, assuming a 10 year lease.

As Figure 3 shows, this takes prime net effective rents in the West End back to 1% below their pre-pandemic peak for a 5-year lease (having fallen by 7.9% during the pandemic). In Midtown, prime net effective rents are now 2.8% below their pre-pandemic peak assuming a 5-year lease (having fallen by 7.8% during the pandemic). In the City of London, net effective rents for a 5-year lease remain further below their previous peak at -4.2% (having fallen by 7.8% during the pandemic). In East London (including Docklands) the net effective rent for a 5-year lease is still 7.0% below the previous peak, only modestly up from the figure of -9.7% at the peak of the pandemic. Figure 4 illustrates the overall trend for each submarket during the cycle. 

OUTLOOK

We expect rent free period incentives for the majority of grade A space to remain broadly static over the next few months, reflecting the renewed economic uncertainty associated with rapidly rising inflation, the potential for further interest rate rises, and the war in Ukraine.

However, for the very best in class, prime located, grade A space in the West End, Midtown and South Bank, we may see a further contraction in rent free incentives, reflecting declining choice. In addition, we have recently seen a few isolated cases of landlords in the West End and Midtown sub-markets increasing advertised rents for best in class, prime-located, grade A space. We believe this trend could become more widespread in the coming months, as take-up improves and the choice of the highest quality space declines. 

Overall, therefore, we expect further increases in net effective rents for grade A accommodation in the West End, Midtown and South Bank this year, as supply tightens further. However, recovery in much of the City of London will continue to lag behind due to the greater availability of high-specification grade A stock. 

It is important to note that these trends only apply to the top quality space in the best locations. For lower quality grade B stock that does not meet the quality and environmental / energy performance criteria that are being increasingly adopted by many occupiers, but where there is an abundant supply, landlords will remain under continued pressure to offer generous rent free period incentives to secure lettings.

DETAILED RENTS BY SUBMARKET

Table 1 details our assessment of current grade A headline and net effective rents across the key central London submarkets. Figure 5 shows the annual change in net effective rents, assuming a 5-year lease.

Source: Carter Jonas
Note: Net effective rents are based on the average typical rent free period, and do not make any allowance for fit out.