Central London Net Effective Rents Monitor Q3 2024

Our Central London Net Effective Rents Monitor illustrates the combined impact of changes to both prime headline rents and the typical length of rent free periods across 22 central London districts.

The Index also reflects different lease lengths by providing analysis of five and ten year leases, which can have a significant impact on the net effective rent for each district.

Note: the impact of the timeframe for the ingoing tenant to carry out its fitting out works has not been factored into the Carter Jonas net effective rent analysis simply because the timeframe will be influenced by the quantum of space to be leased.

Key trends

• Continued upward pressure on prime central London rental pricing is now largely reflected in higher headline rents rather than shorter rent free periods. Prime central London headline rents increased sharply during Q3 2024, by 2.0%. Over the year to Q3 2024 prime headline rents rose by 5.9%.
• There have still been some very modest reductions in typical rent free periods, resulting in a rise in net effective rents of 2.1% during Q3 2024, and of 6.1% over the year to Q3 2024 (assuming a five-year lease).
• Whilst we are still seeing discounts on quoting rents, these are now being based on a much higher starting point in many locations.
• The West End, Midtown, and City of London submarkets have all seen relatively similar rises in prime net effective rents over the last year (to Q3 2024). Midtown saw the strongest increase at 7.7%, followed by the City of London at 7.3%, and the West End at 6.6% (assuming a five-year lease). This marks a significant departure from recent quarters, when the West End has been at the top of the growth table.
• Although the annual figures are relatively similar across the City of London, Midtown and West End submarkets, performance diverged notably during Q3 2024, with the West End seeing no change to prime net effective rents, compared with rises of 3.4% in the City of London and 3.7% in Midtown.
• Rental growth is being driven by ongoing robust demand for grade A space, primarily from the professional and financial services sectors, combined with a decreasing supply of available grade A buildings across much of central London (although the extent of these shortages varies in intensity between districts).
• In some districts, rental growth is also being driven by a new generation of buildings setting new benchmarks in their location, a trend we discuss in the next section of this report.
• Figure 1 compares recent rental growth in central London’s submarkets. This excludes East London / Docklands, where rents remain unchanged due to a much greater supply and lower demand.

• Figure 2 shows the change in prime net effective rents since the bottom of the cycle in 2021. West End rents have seen the largest increase at 24.1%, despite rental growth stalling in Q3 2024. Midtown and the City of London have also seen strong increases, at 18.6% and 14.9% respectively. East London (Docklands) has seen only a modest rise of 4.1% (and no change since Q4 2023).
• Stronger rental growth in the City and Midtown over the last three quarters combined with slower growth in the West End have resulted in a narrowing of the gap in rental values between these submarkets.

Trends by district

• In the West End submarket, the core Mayfair and St James’s district paused for breath in Q3 2024, with the prime headline rent remaining at £145 per sq ft per annum. The West End’s other districts also saw no change. This follows some significant gains over recent quarters, resulting in annual growth in prime headline rents to Q3 of 7.4% in Mayfair and St James's, 10.3% in Soho, and a colossal 17.8% in Victoria / Westminster as key lettings such as the pre-leasing of circa 135,000 sq ft at 105 Victoria Street to Evercore set new rent benchmarks for the area.
• In contrast to the West End, the core City market surged ahead during Q3, with the prime headline rent rising to £85.00 per sq ft per annum, from £75.00 at the beginning of the year , an increase of 13.3%. Prime headline rents in Shoreditch / Clerkenwell have also increased, reaching £72.50 per sq ft per annum, a rise of 3.6%. Meanwhile, the South Bank saw an increase of 3.2% in Q3. In Midtown’s Holborn district, the prime headline rent has risen from £75.00 per sq ft per annum in Q2 2024 to £82.50 in Q3, an increase of 10%.
• Figures 3 and 4 illustrate the rates of rental growth over the last year and the last quarter in central London’s top performing districts.
• So what is driving these trends? This quarter’s pause in the West End’s recent relentless rental growth is certainly not due to a lack of demand, which remains healthy and focussed on prime, sustainable buildings in core well-connected locations. Rather, the issue is a lack of supply, with very little product available and therefore relatively few notably transactions.
• The most significant West End transaction has been the leasing of 220,000 sq ft at The M Building, Marylebone Lane, W1 to accountants BDO, at a rent well in excess of £100 per sq ft per annum. Indeed, we believe that £105-£120 per sq ft is now an established rent for new grade A space in the south Marylebone area. This transaction underlines the dearth of supply, as it leaves less than 60,000 sq ft of the building available even though it is not due for completion until the end of 2025.
• The lack of supply in core locations continues to cause demand to ripple out to other districts, but high-quality options are now increasingly limited across much of central London, and as a result several districts are achieving record rental levels.
• Key among these locations is Covent Garden, which has seen significant rental rises, with £87.50 per sq ft per annum now the benchmark prime headline rent, up from £82.50 in Q2. This is not purely down to a lack of supply, but is also a function of developments setting new benchmarks for this district in terms of quality, providing a new product not previously seen in this location. A good example is the 240,000 sq ft 90 Long Acre (the former First Chicago House), which has been refurbished and extended. Here, the top two floors have been let at a rent significantly in excess of £100 per sq ft per annum, setting a record for this location. Likewise, the iconic Space House looks set to achieve very strong rents – likely to be above £100 per sq ft per annum for the upper floors reflecting their 360-degree views across London.
• Likewise, in the City of London, those tower buildings completed within the last few years have largely been let, and those currently under construction are significantly pre-let, notably 1 Leadenhall, and 40 Leadenhall. Rental levels for upper floors of new City towers have been consistently strong and are breaking records. For example, the top floor of 22 Bishopsgate (circa 22,500 sq ft) has recently been let to a financial services company at a rent understood to be in excess of £120 per sq ft per annum, which has become an established figure for this type of space in the City tower cluster. On the lower floors of new City towers, rental levels are now £82.50-£90.00 per sq ft per annum, compared with £75.00-£82.50 per sq ft per annum 12 months ago.

Outlook

• We expect occupier demand to remain robust. Indeed, we may see further improvements to take-up next year, following greater certainty post the US presidential election and the UK Autumn Budget statement. In addition, ongoing stabilisation of office occupancy levels and improving job creation mean that fewer businesses are downsizing.
• The current limited supply of immediately available grade A stock will decline even further in tandem with continued limited options to take space in buildings currently under construction as pre-lettings take supply out of the market. This will drive further rental growth across much of central London throughout the rest of 2024 and H1 2025 (except in East London / Docklands, where the much greater supply and weaker demand is likely to keep rents static).
• Rent free period incentives are likely to remain broadly stable in Q4 2024 and into 2025. However, we could see a modest decline in typical rent free incentives for the best quality grade A space in locations where vacancy rates are particularly low, most notably the West End.

Table 1 - Prime headline and net effective rents, core central London Districts

Source: Carter Jonas