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Sharp Drop In London Rents As Landlords Offer 'Psychological Reductions'

Rents in many areas of London fell sharply in the final quarter of last year, and landlords are trying to bag tenants using the old trick of pricing things at 99p instead of £1.

Data from Cluttons show that rents in Central London have finally started to dip after a period of post-Brexit resilience.

Sharp Drop In London Rents As Landlords Offer 'Psychological Reductions'
London office landlords are offering 'psychological rent reductions' to snag tenants.

Canary Wharf rents led the way, falling 10.5% in the fourth quarter, Cluttons said. Rents in Hammersmith dropped 9.1%, while rents in both Mayfair and St James’s fell 8.3%. Hammersmith fell the most across the whole of 2017, dropping 13%.

To differentiate their buildings, landlords have started to offer “psychological rent reductions”, Cluttons said, pricing space £2.50/SF below equivalent nearby space to undercut rivals — pretty much the smallest reduction possible and more mental relief than financial.

“Headline office rents have almost defied market realities, but with incentives moving out ever since the Brexit referendum, net effective rates have been falling ever since,” Cluttons Head of Research Faisal Durrani said. “Occupiers remain nervous about committing to new space while the messy Brexit divorce talks unfold and so landlords are moving to entice activity.”

"Canary Wharf has become a 'bargain location', where occupiers are almost certain of securing a good deal," Cluttons said. For instance, some space is available from as little as £37.50/SF, accompanied by a 30-month rent free period on a 10-year lease; something that is unmatched in many other Central London locations.

Canary Wharf
Canary Wharf London

As well as the uncertainty around Brexit, there is also the fact that much of the space being leased in London is occupied by flexible office companies, which then need to re-let that to their clients.

“Q4 2017 headline take-up figures of around 3M SF and a vacancy rate of 5.7% may appear healthy on the surface, with over 500K SF of pre-lets agreed, but there is increasing concern over the portion of this space that will be returned to the market via the ever-buoyant serviced office sector,” Durrani said. “Whilst large deals, like the WeWork pre-let of 186K SF at The Stage in EC2, are positive for statistics, the rental reductions being recorded suggest that actual demand remains relatively subdued.”

To create an accurate picture of the take-up, the availability of desk space within these serviced offices should be factored into overall vacancy as many of the larger serviced offices can take up to 12 months to be fully occupied, he said.

It is not all doom and gloom for the office sector. There is that low vacancy rate for starters.

“The underlying positive for the market is the fact that occupancy levels, at 5.7%, remain below the long run average,” Durrani said.

West End locations like Noho/Soho/Covent Garden and Paddington have been more resilient, with rents holding steady, underpinned by low vacancy rates of around 4%, limited development pipelines and proximity to the Elizabeth Line, aka Crossrail.