Survey, analysis and comment by cebr Agents remain optimistic — despite slower growth in enquiries Growth in enquiries and deals for office space decelerated All areas see modest growth in enquiries slightly in Q2, although City economic growth underpinned the commercial property market. The slowdown of Q2 2006 has not been limited to the core areas of the City. During the last three months the balance of The City’s commercial property Agents are optimistic that enquiries in ‘the City inner core’ fell from +81 per cent in both enquiries and deals will continue rising at a reasonable Q1 2006 to +57 per cent in Q2 2006. Over the same time rate, in line with buoyant financial activity in the Square Mile. period, ‘other areas of the City’ saw the balance of enquiries The latest survey of Agents revealed that 67 per cent expect fall from +62 per cent to +43 per cent. a rise in enquiries in Q3 2006 while only 19 per cent expect a fall (a balance of +48 per cent). However in Q3 2006, growth in enquiries in the ‘City inner core’ is expected to pick up (+67 per cent balance) as are Agents are also hopeful for further growth in deals with a enquiries for ‘other areas of the City’ (+57 per cent balance). balance of +48 per cent expecting growth in Q3 2006. Deals grow strongly in Q2 2006 Financial and business services lead growth in Despite lower growth in enquiries, deals growth picked up in office demand… Q2 2006 with a balance of +48 per cent of Agents reporting growth in deals. This is 21 per cent more than the level of The best performing sectors of the London economy are Agents who reported growth in deals in the first three proving to be City financial and related business services months of the year. However, the Q2 2006 outturn balance which should enjoy output growth in real terms of some 6.5 of +48 per cent is substantially lower than Agents’ per cent and 5.5 per cent respectively, in 2006. Activity expectations made three months ago, with a balance of +85 within these sectors may be sluggish as economic growth in per cent of Agents forecasting growth in deals. On balance, the world economy eases and if recent stock market Agents expect the growth rate of deals to remain the same uncertainties continue. This is reflected in the expectations next quarter (Q3 2006) as outturns experienced in Q2 2006. of Agents for the coming quarter (Q3 2006). Rent growth sluggish on slowing demand …But growth in enquiries slow in Q2 2006 Reduced demand growth for office space has resulted in a Between April and June 2006, City Agents saw the number slower growth of rents reported by City Agents. The ‘City of enquiries from businesses looking for office space in the inner core’ saw rents rise by £2 and ‘other areas of the City’ Square Mile, rising but at a slower pace than Q1 2006. experienced a rise of £3 in the quarter. This is down from a During Q2 2006, 48 per cent more Agents reported growth £5 increase in each area in Q1 2006. in enquires than reported a decline. Although this remains a With demand growth expected to be steady in Q3 2006 healthy balance, it is significantly down on Q1 2006 outturns Agents do not expect much growth in rental prices. In the when the balance stood at +69 per cent. ‘City inner core’ prices are expected to remain flat at £41 and forecast to rise in ‘other areas of the City’ by just £1. Looking to the future, a balance of +48 per cent of the City’s Agents expect growth in enquiries in Q3 2006 — mostly from ‘banking’, ‘other financial services’, ‘insurance’ and ‘law’ — all of which observe rates of above 40 per cent. DETAILED RESULTS Table 1: Distribution of responses regarding enquiries Last Quarter Next Quarter About the survey Q2 2006 Q3 2006 The survey of City Agents records changes in enquiries, deals Fell substantially/ and rents for office space in the City of London. It charts Will fall substantially 0% (0%) 0% (0%) Agents’ experiences over the past quarter and gauges their Fell moderately/ expectations for the coming quarter. Will fall moderately 19% (8%) 19% (4%) The survey is based on a qualitative rather than quantitative Was unchanged/ approach, using the ‘balance statistic’ which is the difference Will be unchanged 14% (15%) 14% (15%) between the percent of respondents replying ‘rose’ minus the percent replying ‘fell’. The trend in the balance gives a good Rose moderately/ Will rise moderately 67% (77%) 67% (77%) signal of the trend in the indicator under consideration. Rose substantially/ Overview Will rise substantially 0% (0%) 0% (4%) Slower growth in enquiries and deals reflect Balance +48% (+69%) +48% (+77%) Figures in brackets are the results from the previous survey market uncertainty (Balance figures may not sum to total due to rounding) With strong performance in business and financial services in the City, Agents have continued to see growth in both Figure 1: Balance of enquiries enquiries and deals. However, as the world economy slows (+100 — all Agents report that enquiries have risen, -100 — all Agents down in response to high interest rates in the US and record report that enquiries have fallen) oil prices, activity within these sectors may be hit. This is evident in expectations of the slower growth posted in Q2 100 2006 of enquiries and deals carrying through into Q3 2006. 80 Enquiries 60 Growth in enquiries is strong but has slowed 40 20 In the latest survey, Q2 2006, City Agents report a rise in the number of enquiries for a fifth consecutive quarter, 0 compared with the previous quarter (January – March 2006). Q1 1999 Q3 1999 Q1 2000 Q3 2000 Q1 2001 Q3 2001 Q1 2002 Q3 2002 Q1 2003 Q3 2003 Q1 2004 Q3 2004 Q1 2005 Q3 2005 Q1 2006 -20 In Q2 2006, the overall balance in enquiries was +48 per -40 cent with 67 per cent of Agents experiencing a ‘moderate’ -60 rise in enquiries and 19 per cent witnessing a ‘moderate’ fall. No Agents reported a substantial rise or fall. -80 The slip in enquiries growth — particularly from financial -100 and business services — is likely to have been influenced by the uncertainties in world markets and decline in the FTSE during Q2 2006. The FTSE has since edged back up and this Growth in enquiries for largest office spaces should help boost City activity and demand for office space fall in Q2 2006 in Q3 2006. Growth in enquiries slipped across all office space sizes last And Agents are less optimistic quarter. Enquiry growth was far below the expectations reported three months ago where enquiries for all office Just 48 per cent more Agents expect growth in enquiries next spaces were forecast to either remain steady or grow. quarter – exactly the same balance as the outturn for Q2 Indeed, the balance for office space sizes 250,000 square feet 2006. This demonstrates the decline in optimism compared and over actually fell by 31 percentage points to -5 per cent to three months ago when 77 per cent more Agents said they rather than an expected 12 percentage point rise to +38 per expected to see growth in enquiries. With the FTSE 100 cent. around the 5,800 mark (300 points below its late April peak) confidence remains well below that of Q1 2006. Agents believe that in Q3 2006 there will be a pick up in enquiries growth for office space sizes of over 15,000 square feet. However, enquiries are expected to slip for smaller office space sizes with fewer Agents forecasting growth, in enquiries for spaces under 14,999 square feet, than the balance of Agents who saw growth in enquiries in Q2 2006. Table 2: Balance of enquiries about office space of… All areas of the City grow at a slower pace Last Next Quarter Quarter Enquiries in the ‘City inner core’ continued to grow more than ‘other areas of the City’ last quarter. The balances were Q2 2006 Q3 2006 +57 per cent and +43 per cent respectively. Despite the drop Under 5,000 sq ft 67% 57% in demand for office space in Q2 2006 compared to the 5,000 to 14,999 sq ft 62% 57% previous quarter, the high demand from larger firms in the City – particularly in the ‘banking’ and ‘other financial 15,000 to 49,999 sq ft 19% 48% services’ sectors are likely to have been the driving force. 50,000 to 99,999 sq ft 25% 53% However, the 24 percentage point difference between the Q2 2006 and Q1 2006 outturns for growth in enquiries is a 100,000 to 249,999 sq ft 5% 26% likely result of a less buoyant performance in these sectors. 250,000 sq ft and over -5% 11% Over the next quarter Agents are expecting the balance of enquiries to increase in both the ‘City inner core’ and ‘other A dip in office demand growth from financial areas of the City’. The ‘City inner core’ is forecast to remain services the most desirable area with a balance of +67 per cent compared to +57 per cent for ‘other areas of the City’; In Q2 2006, all sectors experienced slower growth in however this gap continues to close as indicated through enquires. The strongest growth was witnessed in the ‘other previous quarters. financial services’ sector. However, a balance of +57 per cent was significantly down on the Q1 2006 balance of +85 Table 4: Balance of enquiries about office space in… per cent. The +57 per cent outturn was also much lower Last Next than expectations three months ago (+77 per cent balance). Quarter Quarter With a balance of -15 per cent the growth in enquiries from Q2 2006 Q3 2006 the ‘public sector and NGOs’ fell in Q2 2006 from +8 per cent in Q1 2006. The City inner core +57% +67% Table 3: Balance of enquiries about office space from Other areas of the City +43% +57% companies in… Last Next Deals Quarter Quarter Deals growth rises but not as much as Q2 2006 Q3 2006 expected Banking +48% +43% Deals continued to grow in Q2 2006 with 38 per cent of Other financial services +57% +48% Agents stating that deals had risen ‘moderately’ and 14 per Insurance +29% +43% cent stating they had risen ‘substantially’. Despite the balance rising from +27 per cent in Q1 2006 to +48 per cent Law +43% +43% in Q2 2006, this is far short of the +85 per cent forecast by Other consultancy +19% +24% respondents in the previous survey. Other corporates +10% +19% Table 5: Distribution of responses regarding deals Accountancy +10% +29% Last Quarter Next Quarter Q2 2006 Q3 2006 Public sector and NGOs -15% -5% Fell substantially/ Looking to the future not all Agents are expecting a swift Will fall substantially 0% (0%) 0% (0%) return to increasing growth. Over Q3 2006, growth in enquiries for offices in ‘banking’ and ‘other financial services’ Fell moderately/ is expected to be more modest, as the market instability and Will fall moderately 5% (15%) 10% (0%) the US slowdown puts a strain on these sectors. Was unchanged/ All other sectors are confident that enquiries will grow at a Will be unchanged 43% (35%) 33% (15%) faster rate between July and September 2006. Agents in Rose moderately/ ‘accountancy’ are particularly optimistic compared with Q2 Will rise moderately 38% (42%) 57% (77%) 2006 and expect enquiries to grow with a balance of +29 per Rose substantially/ cent forecasting growth in enquiries in Q3 2006 compared to Will rise substantially 14% (4%) 0% (8%) the outturn balance of just +10 per cent in Q2 2006. Balance +48% (+27%) +48% (+85%) Figures in brackets are the results from the previous survey (Balance figures may not sum to total due to rounding) Over the next quarter respondents expect deal growth to Views remain the same as the outturns for Q2 2006 – with a balance of +48 per cent. Agents are optimistic about enquiries Agents indicated that growth in deals increased the most for Agents were asked to record their observations of conditions office spaces between 5,000 and 14,999 square feet, with a in the marketplace. Most Agents expect to continue seeing balance of +62 per cent. The balance of deals was flat for steady growth in the market, however at a reduced rate from office space sizes between ‘50,000 and 99,999 square feet’, previous quarters: with the number of Agents experiencing growth in deals “Generally quieten down slightly during the holiday period” equal to the number that saw a fall. The largest spaces (over 250,000 square feet) experienced a -11 per cent balance. As “Will remain stable — no evident driver for significant increase in with enquiries, it is likely that as the large financial and demand” banking firms suffered from a less certain stock market they Some have started to notice the impact that world market have reined in their number of deals. slowdown is having upon rental demand and expect it to affect particular areas: The distribution of deals between the different areas of the City was quite even in Q2 2006. In the ‘City inner core’ the “I do expect continued high activity in the legal sector and I do balance of deals stood at +52 per cent where in ‘other areas expect more (albeit muted) activity in the financial sector as a of the City’ the balance was +48 per cent. It is expected that reasonably significant slug of the "grey market" in space appears to deals will grow in Q3 2006 with a balance of +48 per cent of have been taken up”. Agents expecting growth in deals in both the ‘City inner core’ and ‘other areas of the City’. Over the next quarter respondents reported that the fastest CAQODS is compiled from an online survey of 37 Agents, growth in deals will come from the ‘bank’, ‘other financial conducted between 18 July and 09 August 2006. The number services’ and ‘law’ sectors. However, deals in the ‘public of Agents surveyed has fallen as a result of two mergers sector and NGOs’ is set to slow with 5 per cent more Agents taking place since the last survey. There were 23 responses expecting a fall in Q3 2006. This is likely to be the result of received, giving a response rate of 62 per cent. government spending cutbacks, efficiency drives and a move to distribute some functions of central government out of London. Thushani Gajasinghe Rents centre for economics and business research ltd tel: (020) 7324 2865 Slower rent growth the result of reduced growth in demand According to respondents, ‘City core’ rents rose to £41 per square foot in Q2 2006 from £39 per square foot in Q1 2006. In ‘other areas of the City’, rents grew to £35 per square foot from £32 per square foot in Q1 2006. As always, average rents may be understated as they are unweighted CAQODS is published quarterly and is available from the which means that equal emphasis is placed on small deals as research team in either hardcopy or electronic format via our on large deals. website at: www.cityoflondon.gov.uk/economicresearch This slowdown in rent price increases will continue into Q3 2006. Indeed, ‘City core’ prices are set to remain on hold For further details, please contact: whilst rents in ‘other areas of the City’ will grow by just £1. Davinder Jhamat Table 6: Average per square foot rent of deals Economic Development Office concluded/that are expected to be concluded in… City of London Last Next PO Box 270, Guildhall, Quarter Quarter London EC2P 2EJ Q2 2006 Q3 2006 (020) 7332 3321 The City inner core £41 £41 Other areas of the City £35 £36 The City of London Corporation is committed to the highest standard and quality of information and every reasonable attempt has been made to present up-to-date and accurate information. However, the information in this publication has been provided for information purposes only and the City of London Corporation gives no warranty, express or implied, as to the accuracy, timeliness or decency of the information and accepts no liability for any loss, damage or inconvenience howsoever arising caused by, or as a result of, reliance upon such information.