Agents remain optimistic — despite slower growth in enquiries by dfhercbml


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									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.
Enquiries                                                              60

Growth in enquiries is strong but has slowed                           40

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
In Q2 2006, the overall balance in enquiries was +48 per               -40
cent with 67 per cent of Agents experiencing a ‘moderate’
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
 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:
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.

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