The pockets of London propping up the prime commercial property market

The commercial prime market is, for want of a better word, doing OK.

In the City, leasing increased by one per cent over its long-term average in the second quarter, while overall demand was 12 per cent below its long-term average.

For a sector pummelled by downsizing amid changes to weekly working patterns, it’s not too bad, and probably about to get better.

But on closer inspection, the commercial prime picture is slightly more complicated: a few particular pockets have been propping up the modest market, with two in particular accounting for a huge proportion of lettings.

Demand has been particularly strong from insurance and financial services, which together accounted for nearly a third of the office space leased in 2024.

Investment in luxury retail on Bond Street accounted for over nine-tenths of transactions in retail properties in London in the second quarter.

And across the board, a majority of lettings have been for sustainable properties.

Retail investment in Bond Street 

Despite the global luxury goods slowdown, investors have been lining up to invest in Bond Street’s retail properties.

Transaction volumes for properties on Britain’s most expensive street reached £436m in the second quarter, according to Savills – up 66 per cent year on year.

Having the right foothold and brand appearance in an incredibly competitive, slowly recovering luxury market is crucial for brands, making one of London’s most exclusive streets an excellent place to be.

Bond Street accounted for 91 per cent of all central London retail investment in the second quarter, Savills found.

Sir James Dyson’s Weybourne family investment firm acquired 126-127 New Bond Street from a private Hong Kong investor for £71m, while Swiss luxury goods group Richemont – owner of Cartier and Chloé – has purchased Boodles’ main store for £82m at 178 New Bond Street.

Louis Vuitton, Chanel, Prada and Sotheby’s have also all bought properties on the street.

In comparison, Regent Street has experienced a substantial reduction in vacancy rates over the past year, dropping from 10.9 per cent to 3.0 per cent in the second quarter, Savills said.

Hedge funds in the West End 

Hedge funds have become as synonymous with Mayfair as bespoke tailoring and elegant townhouses in recent decades.

Take-up of commercial prime office space by these niche financial firms increased by 46 per cent between 2019 and 2023, according to Knight Frank.

“Despite speculation around a mass exodus of niche financial firms post-Brexit and with recent capital market challenges, London is clearly a critical growth hub for the sector,” James Fairweather, Partner at Knight Frank, said.

More than 70 per cent of office deals by hedge funds made between 2019 and 2023 were for properties in the West End.

Hedge funds took up 481,575 square ft of office space in 2023, up 179 per cent from 172,575 sq ft in 2019, according to Financial News.

One of the biggest deals in the region was Millennium Management’s prelet of the entirety of 50 Berkeley Street in December 2023. The deal marked a return of Izzy Englander’s multi-strategy hedge fund to the building (it originally left in 2004) where it said it would base its European headquarters.

Other notable deals have included Great Hill Partners, which opened an office at Fitzrovia’s 60 Charlotte Street, to serve its regional hub for the UK and Europe, and One Rock Capital Partners, which set up its European HQ at 33 King Street in St James’s.

For hedge funds, the necessity to be close to central London for overseas clients, transport links for out-of-town workers, and other hedge funds for networking and easier visitation (if clients are visiting multiple funds at once) makes the West End an ideal place to settle.

Sustainable space, city-wide

Recent data shows that demand for sustainable office buildings has been the main driver of office take-up in the city this year, with over half of lettings in buildings with excellent or outstanding environmental ratings.

“There has been a clear flight to quality, with grade A rents in attractive locations reaching record levels,” Mike Hook, Executive Director at LMG, said.

Julian Woolgar, Partner at Knight Frank said: “The workplace is now viewed as a strategic tool and hence companies are upgrading to better quality buildings in desirable locations that support talent enrichment.

“The West End continues to see intensifying competition for the best quality office space, as niche financial firms jostle for the same specific locations with limited supply.”

Savills has over 2m sq ft of commercial prime office space in the Square Mile under offer, surpassing the long-term mean by 21 per cent.

“The market in 2024 will be driven by downsizing more than expansion. As pre-pandemic leases come to an end, tenants will be looking for more for their money: smaller spaces, higher quality,” Hook said.

“Tenants are also reluctant to settle for older properties, as the flight to quality is real – meaning their expectations are higher when it comes to smart tech and modernised refurbishments,” he added.