London Market:Once considered a one-way bet, Irish investors may have to look again at the London market, says Gretchen Friemann
Predictions of a slowdown in London's office market are starting to intensify as the crisis gripping global credit markets shows little sign of easing.
Over the past few years Irish investors have spent billions snapping up key properties throughout the capital, largely on the basis that higher rents will continue to drive healthy returns.
And while that assumption has so far proved a safe bet, with London now the priciest location for top-end office space, a more pessimistic view is starting to take hold as analysts drastically revise their rental growth forecasts in the wake of the credit market upheaval.
Despite the spreading gloom, however, there is still plenty for investors to cheer. Over the weekend it emerged that developer David Arnold had secured the world's most expensive rent on his property at 12 St James Square in London's West End after the hedge fund group, Permal, agreed to rent two floors at up to £1,508/€2,164 per sq m (£140/€201 per sq ft).
It is the highest price ever paid for office space and comes amid deepening concerns about the long-term health of the financial services sector.
London's West End has been one of the strongest performers over the past few years with rents regularly tipping over £1,132.5/€1,625per sq m (£105/€151 per sq ft). This latest letting on a building that was redeveloped by Arnold's private property investment company, D2, may convince some investors that the bad news has been over-stated.
According to Michele Jackson, director of overseas investments at DTZ Sherry FitzGerald, the agency that secured the letting, the shortage of high-spec space across most of London's sub-markets will continue to drive rental growth throughout the second half of this year.
And she claimed that Irish investors remained focused on central London despite the turbulent summer.
The key areas are "mid-town, Victoria, Southwark and Canary Wharf where occupiers can benefit from lower rents compared to the West End".
She added that the "focus was on high quality buildings with good floor plates adjacent to excellent public transport links where the time of a break or a review will catch the rental growth wave".
Yet in the current volatility, such resolutely sanguine assessments are being overwhelmed by a slew of negative headlines. A report in last weekend's Sunday Telegraph revealed that almost half of the planned office developments for the City of London could be scrapped or postponed due to the ongoing financial crisis.
The paper claimed that the agency, CB Richard Ellis, now expects to see just 232,258sq m (2.5 million sq ft) of space constructed over the next five years compared to a planned 418,064sq m (4.5 million sq ft) and described that as equivalent to the capital losing two to four skyscrapers a year between 2009 and 2011.
The story capped a week in which the UK's largest listed property funds - British Land, Hammerson, Minerva and Land Securities - suffered heavy losses after Merrill Lynch downgraded the stocks over fears that demand for office space from financial services companies could weaken.
Financial institutions - like banks, hedge funds and private equity firms - have fuelled London's office market boom and the concern is that a contraction in this sector will reverse the strong rental growth story. If that prediction turns out to be correct some Irish investors may have to look again at what was supposed to be a one-way bet.
