Commercial property rents collapse in London hedge fund areas

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The Independent Online

Rents for plush offices in Mayfair and St James's plunged almost 30 per cent last year, hammered by the declining fortunes of many of their hedge funds tenants.

The commercial property agency NB Real Estate has released new research that shows the rent in swanky west London offices tumbled from £120 per square foot at the end of 2007 to £85 at the end of last year, a consequence of a bad year for hedge funds. They have been vilified for short selling bank shares, have suffered mass redemptions and experienced their worst ever full-year losses.

The average hedge fund lost 18.3 per cent, according to figures compiled by Hedge Fund Research.

The Hedge Fund Implode-O-Meter, a website set up to monitor collapsed and ailing alternative investors, now reports that 108 funds at 66 companies have collapsed since the end of 2006. The latest to succumb was the high-profile failure of Bernard L Madoff Investment Securities.

James Gillett, director of NB Real Estate's central London markets team, offered this analysis: "Investment banks and commercial banks have had it tough, but hedge funds are having an even tougher time.

"The boom in the hedge fund sector meant they paid scant regard to the property costs they were taking on. The sector's high profitability meant that they were willing to substantially outbid the rest of the market to get their staff into the right space quickly."

The downturn has forced hedge funds to cut costs and renegotiate rents, leaving the landlords with little option but to reduce their rents and increase incentives – which include offering rent-free periods – as the number of tenants dwindles.

The fall in rents was reflected throughout the City as financial groups suffered the effects of the worsening economy, although they were not generally as badly hit as the zones which are associated with hedge funds. Average rents across the City fell 19 per cent from £65 per square foot at the end of 2007 to £52.50 in the last three months of 2008, "as the credit crunch savaged the fortunes of the financial services sector", NB said.

Vacancy rates for offices rose from 9.6 per cent to 11 per cent in the fourth quarter of 2008. The group said the next six months may see a further "aggressive downward adjustment" to rents across central London. "As jobs are lost, occupiers will bring more surplus space to the market," it said.