Survey's "surge" in London construction activity hides a two-speed market, expert says

Infrastructure law expert Graham Robinson of Pinsent Masons, the law firm behind Out-Law.com, said that the annual London Offices Crane Survey by commercial property analysts Drivers Jonas Deloitte was indicative of a "two speed market", in which Greater London had benefitted from a "considerable increase in corporate profitability and international investment".

"The outlook for UK total all-property returns is flat to marginally negative in 2012, with a more positive recovery expected in 2013," said Robinson, who held a recent roundtable with insurance broker Lockton and a number of London and regional property developers. "A weaker macro-economic environment, particularly in the eurozone, is expected to lead to lower than expected growth prospects for UK property and also capital investment in construction."

However, he added that that the ongoing lack of funding and fiscal tightening in the public sector was leading to the introduction of "alternative funding models" to help fund much-needed infrastructure and kick-start regeneration.

The Drivers Jonas Deloitte survey noted that construction levels were "still relatively low in absolute terms"; however the volume of activity in the capital had trebled since a market low in the wake of the 2008 financial crisis.

The survey showed a 28% increase in the amount of commercial office space under construction over the last six months, with 9.2 million square feet underway. In addition, the statistics indicated that activity had returned to the King's Cross and Docklands areas for the first time in 18 months, the company said.

"While construction continues to rise in the core City and West End markets, our research also shows that activity has returned to King's Cross and the Docklands, as well as a further increase in activity along the Southbank," said research head Anthony Duggan. "This is a sign that developers feel that the low levels of construction (compared to historic trends and lower building costs are compelling. Positively, pre-letting is again a feature of the market, which should be a key focus for those with appropriate sites."

However, he warned that although "significant opportunities exist", tenant demand remained slow in certain sectors.

"Get the product and/or location wrong and the pitfalls could be just as large," he said.

Much of the reported development was refurbishment schemes, the company said, with refurbishments now accounting for 22% of construction activity. In addition, relatively short build times had boosted projected completion data for 2013 by an extra 1.1m sq ft. An average of 2.3m sq ft of available office space was expected to be delivered over the next three years, the survey said, with 2.9m sq ft due in 2013.

Matthew Elliott, head of Drivers Jonas Deloitte's London offices, said that although these numbers represented just over half of the average take-up levels for Grade A office space over the last 10 years, declining occupier demand meant that London now had a surplus of quality space waiting to be occupied.

"It may not be the market we are used to but having cautious tenants and cautious developers makes for a balanced market," he said. "This new reality gives the market stability which tenants like and yet underpins rents, which comforts investors. I can't remember a recession in which prime rents have held up and yet, by and large, this is what we are seeing."