The Carter Jonas Net Effective Rents Index

Welcome to the fourth edition of our Central London Net Effective Rents Monitor, which illustrates the combined impact of changes to both headline rents and the typical length of rent free periods across 22 key central London districts. 

The Index also reflects different lease lengths by providing analysis of five and ten year leases, which has a significant impact on the net effective rent for each district. 

Note: the impact of the timeframe for the ingoing tenant to carry out its fitting out works has not been factored into the Carter Jonas net effective rent analysis simply because the timeframe will be influenced by the quantum of space to be leased. 

Net effective rents – the headline results

Our Central London Net Effective Rent Index reveals the impact that changing rent free period incentives are exerting on grade A office market rental trends. 

Across central London as a whole, prime headline office rents fell by only 1% during the pandemic. However, taking into account the impact of increasing rent free incentives, net effective rents for a 5-year lease fell by 8%, with a fall of 6% assuming a 10-year lease. Although rent free incentives show a more pronounced market correction than headline rents, the overall performance of the London grade A office market has proved to be remarkably resilient given the scale of economic uncertainty over the last two years.

The market is now firmly in the recovery phase for grade A space in prime locations, with occupiers facing a decreasing choice of premium quality buildings that are now the focus of demand.

We are seeing this to a greater extent in movements in prime net effective rather than prime headline rents. Indeed, prime central London headline office rents were broadly static in Q1, and have barely moved over the last year. However, increasing take-up of grade A space across central London since mid-2021 has boosted the confidence of landlords in lease negotiations, particularly in the West End, Midtown and South Bank sub-markets. As a result, we are now seeing upward pressure on landlords’ advertised rents for best in class, prime located space, in tandem with reductions in the level of rent free periods that landlords are willing to offer to secure lettings. 

Over the year to Q1, grade A net effective rents across central London increased by 4.7% assuming a 5-year lease, and by 3.1% assuming a 10-year lease. During Q1 2022, net effective rents increased by 1.4% assuming a 5-year lease, and by 0.5% assuming a 10-year lease. These trends are shown in Figure 1.

However, grade A net effective rents across central London still have ground to make up before returning to their pre-pandemic levels (as Figure 2 illustrates). Net effective rents are 3.7% below their Q1 2020 pre-pandemic level assuming a 5-year lease (and are 3.0% below assuming a 10-year lease). 

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.

Submarket

Grade A headline rent

Net effective rent (10-year lease)

Net effective rent (5-year lease)

West London

Hammersmith

57.50

45.04

44.56

White City

52.50

41.13

40.69

West End

West End Central – Mayfair, St James’s

115.00

92.96

93.92

West End North – Fitzrovia

92.50

74.77

75.54

West End North – Marylebone

95.00

76.79

77.58

West End South – Victoria, Westminster

77.50

62.65

63.29

West End West – Paddington

77.50

62.65

63.29

West End East – Soho

92.50

74.77

75.54

Midtown

Midtown East – Holborn

70.00

56.00

56.58

Midtown West – Bloomsbury

85.00

68.00

68.71

Midtown North – King’s Cross

85.00

68.00

68.71

Midtown South – Covent Garden

77.50

62.00

62.65

City of London

City of London – Bank, Leadenhall Street

70.00

55.42

55.42

City Fringe North – Shoreditch, Clerkenwell

68.50

54.80

55.37

City Fringe North – Farringdon

85.00

68.00

68.71

City Fringe East – Aldgate East

56.50

44.26

43.79

City Fringe East – Spitalfields

65.00

50.92

50.38

South Bank – Southwark, London Bridge

 

72.50

 

58.60

59.21

East London

Canary Wharf

52.50

40.91

40.25

Crossharbour

35.00

27.27

26.83

Stratford

47.50

37.01

36.42

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. 

 

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@ Michael Pain
Michael Pain
MRICS
Tenant Advisory - London
020 7016 0722 email me about Michael
@ Daniel Francis
Daniel Francis
Head of Research
020 7518 3301 email me about Daniel
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Michael is Head of Carter Jonas’ London Tenant Advisory Team and specialises in providing office search, lease negotiation, relocation management, rent review and lease restructuring consultancy services to office tenants based in Central and Greater London. He has over 20 years experience and his clients include international corporates such as Hitachi, Warner Bros and Hackett, not for profit organisations such as The Overseas Development Institute and The Nursing and Midwifery Council as well as owner-managed businesses including Wavex Technology, Credo Business Consulting and Turley Associates.

The range of consultancy services provided by Michael and his Team include advising on office availability, rents and rent free periods, undertaking property searches, representing tenants in lease negotiations, developing office relocation project plans, timetables and budgets and project managing each stage of the relocation process, including overseeing the pre-contract due diligence, and co-ordinating the activities of all those consultants who will be involved in the office move.

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Daniel Francis has been Head of Research at Carter Jonas since 2018. He is responsible for delivering the firm’s programme of market and topic-based research, providing clients with the insight they need. Daniel’s main focus is the commercial market, and he works closely with his rural and residential research colleagues. 

Daniel is a member of the Investment Property Forum and the Society of Property Researchers.
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