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London faces three-year office-space shortage

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London faces a shortage of new office space over the next three years and will not suffer any Brexit-driven downturn, according to a new report

Property consultancy Knight Frank claims the biotech, technology, media and telecoms industries had driven demand to such an extent there is a risk of a supply shortage in the capital.

The consultancy said there had been an extra 2 million sq ft (186,000m²) of office space leased in London in 2017 compared with 2016. This huge rise resulted in a total of 13.8 million sq ft (1.3 million m²) of offices let last year. But the immediate future development pipeline looks unlikely to be able to meet a similar level of demand.

The AJ’s sister title Construction News warned that out of the 72 commercial developments underway in the capital, only two-thirds will have space available for lease, the rest being pre-let.

What’s more, a quarter of these will not be complete until 2020, creating the prospect of a short-term squeeze on supply over the next three years.

Knight Frank head of central London Stephen Clifton said: ‘While this shows tremendous confidence in London after the EU referendum, supply also peaked in 2017 and is now in the process of falling.

‘This implies that going forward there will be increased demands for pre-lets as there is a lack of quality supply in the pipeline, and this will put pressure on developers, landlords and operators in the market.’

Deloitte’s most recent London crane survey, released in November, showed the number of new office developments starting on site had hit a three-year low, which was partially blamed on Brexit uncertainty.

But Knight Frank believes any job losses that occur over the next two years due to Brexit will be offset by new job creation, which will maintain demand for office space.

Knight Frank chief economist James Roberts said: ‘There is a perception held by some that London’s economy must be suffering as a result of the move towards Brexit, but this is not in evident in the statistics.

‘Employment is rising and unemployment is falling in the capital, while inward investment continues.’

January’s PMI figures (purchasing managers’ index) showed the first increase in activity in commercial construction for six months, suggesting confidence could be returning to the sector.

In spite of any political uncertainty, London real estate remained the most attractive in the world for overseas investors.

The capital saw £14.2 billion of deals completed by overseas investors in 2017, more than two-and-a-half times the amount invested in second-placed New York City, which saw £5.1billion of transactions.

The main source of investment was from China via Hong Kong, which accounted for 39 per cent of transactions.

Knight Frank does not expect Brexit to lead to a reduction in foreign investment and expects China, Japan, South Korea and Singapore to continue to invest heavily in the capital.

2026 city of london skyline view from southbank

2026 city of london skyline view from southbank

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Readers' comments (2)

  • I have to wonder if this rosy picture of the office building sector is somewhat overhyped.
    Many forces are mitigating against the centrality of offices.
    Tech is enabling many office workers to work remotely. Permitted development rights make it quite simple to have an office in the garden. Southern Rail is doing its part.
    Time is too precious to spend commuting.
    All in all, I would bet construction of offices will turn into a dicey venture. Better design them with an eye to converting into flats.

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  • Why will an alleged increase demand for pre-lets put pressure on developers? They will be laughing all the way to the bank! Actually a requirement for pre-lets is usually evidence of an uncertain market, not the other way round. Most confusing.

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