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London office vacancies surge as company moves leave holes
[LONDON] Modern office buildings are all the rage in central London, with a swath of companies including UBS Group AG moving into new premises in the last 12 months. The problem for landlords is finding someone to replace them.
A growing number of unoccupied older properties caused the overall office vacancy rate to climb to 5.8 per cent at the end of the first quarter from 3.9 per cent a year earlier, according to data compiled by Deloitte LLP. That was the biggest increase since 2009.
"The demand for new space is still there; the demand for second-hand space isn't necessarily as hot," said Shaun Dawson, a research manager at the firm.
Investors pulled back from London real estate immediately after last year's Brexit vote, fearing that the UK's departure from the European Union would cause a collapse in demand for office space. While high-profile lease agreements by companies including Apple Inc and Deutsche Bank AG have helped ease concerns since the June 23 vote, the latest data from Deloitte show there are limits to the market's recovery.
The amount of office space available to rent climbed 36 per cent in 2016 and by a further 19 per cent in the first quarter, Deloitte said in a report published on Wednesday. That's almost entirely made up of space that has become available as a result of companies downsizing or moving offices, the data show.
UBS, for example, completed a large office move last year, vacating several older buildings in favour of a single new London headquarters.
The amount of office space under construction in central London fell 6 per cent to 13.1 million square feet in the six months through March, the first drop recorded by the biannual survey since September 2014. That was after developers completed 3.9 million square feet of new office space in the period, the most Deloitte has recorded since 2004.
"We have started to see developers hold off," Mr Dawson said, citing increasing construction costs and weaker demand because of political uncertainty. "We are feeling that post-Brexit blip." British Land Co, the UK's second-largest real estate investment trust, committed to redeveloping 100 Liverpool Street before it had secured a tenant after the building's main occupier, UBS, vacated the property at the end of 2016.
"There is going to be uncertainty ahead and it's going to be very hard to call," chief executive officer Chris Grigg said Wednesday on Bloomberg TV when asked about Brexit. "There's going to be continued polarisation: if you've got something that is average, I think you're going to struggle."
British Land published its full-year earnings on Wednesday. The landlord fell as much as 2.5 per cent, the most since March 30, in London trading.