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London faces office shortage

A sharp fall in the availability of central London offices is rapidly creating a landlords' market in the capital. Rents are rising faster than expected and incentives such as rent-free periods are disappearing.

In the City, which suffered more than any other area of London from over-building in the boom of the late 1980s, the vacancy rate has fallen from 13 per cent to 9.5 per cent.

As a result rents are pushing ahead after four years of decline. Top rents in the West End, where shortages are most acute, are now about £42.50 for good quality new buildings.In the City they have risen from £30 in 1993 to about £32.50.

While these compare with rents in the late 1980s of £70 in the West End and £65 in the City, the improvements are the first concrete good news for the industry in almost half a decade.

Stephen Hubbard, in Richard Ellis's West End office, believes rents coulds reach £50 per square foot in the top areas of Mayfair and St James's by the end of the year. In the City they are expected to touch £40.

"In some ways the market is similar to that of 1987, when there was strong take-up of prime quality space without any new buildings becoming available" he said.

Only two or three schemes are likely to come on stream in 1995, and with the exception of a 55,000 sq ft project in Knightsbridge all are relatively small.

Henrietta House, a 100,000 sq ft scheme north of Oxford Street, is the only sizeable building available in the area and that is only still vacant because of its position away from the West End's prime locations.

According to Richard Ellis, only 7.4 million square feet of offices are on the market in the West End and only just over 1 million of that is new space. Last year, 1.1 million square feet of new space was taken up by new tenants, suggesting that the supply will run out before the end of the year.

The picture is broadly similar in the City, where 1.8 million square feet of new space remains compared with take-up last year of 1.6 million. In Holborn, there is little more than one year's supply of new space.

John Slade, in Richard Ellis's City office, thinks only 200,000 square feet of new offices will come on stream in the Square Mile in 1995, and probably no more than 750,000 square feet in 1996.

One reason for the mis-match between supply and demand is thought to be the extent to which developers were burned by the recent downturn in the property market. Many developers are waiting for hard evidence of higher rents before they take the plunge.

A further inhibiting factor is the absence of bank finance in the market, the main reason for the explosion of development in the late 1980s.

Many of the banks that supplied funds for the binge of building seven years ago were from overseas, and problems in the domestic property markets of France, Germany and Scandinavia are limiting further funds from those sources.

With funds more difficult to come by, the market could come out of the current cycle in stronger shape than last time, because competition for a limited number of buildings will keep the upward pressure on rents.

That could finally give a fillip to the quoted property sector, which included some of the worst performing shares last year as expectations of higher rents - and therefore higher capital values - were disappointed.

The figures from Richard Ellis do not include London's Docklands, which was one of the biggest beneficiaries of last year's squeeze on space in the capital's traditional office locations.

Agents for Canary Wharf, Docklands' most important development, deny that they have taken space off the market in the hope of securing higher rents in a year or so, but they admit they are holding out for relatively high rents, knowing that sooner or later they will achieve them.

The top floors of 1 Canada Square, Britain's tallest building, are currently on offer for £40 per square foot, as much as prime space in the West End.

Last year 850,000 square feet of space was taken up in the development, reducing the vacancy rate to about 25 per cent, with high-profile occupiers such as Morgan Stanley and BZW signing up for large offices.

One of the attractions of Docklands is that, as new lettings, its offices qualify for much lower business rates than buildings in the rest of the capital, where notional rate reductions have been capped to subsidise transitional relief for higher rates elsewhere in the country.

According to agents, this could make total occupation costs in the Docklands as little as half those in the City and West End.