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Economically, 2007 has maintained the relatively strong growth seen in 2006. The CIPS/RBS Business Activity Index showed an average score of just over 58 in the first quarter. This is down slightly on the previous quarter but still indicates an increasing rate of growth (a score of 50 would indicate no change). For comparison, the average scores for 2004, 2005 and 2006 were 57.2, 56 and 58.5 respectively.

Business services firms continued to record the sharpest rates of expansion, but growth was weakest in the financial intermediation part of this sector. March 2007 data from the same survey points to a further rise in staffing levels, albeit at the lowest rate for seven months. On the face of it this looks like the passing of the peak reached at the end of 2004. However, employment is still growing and at levels that exceed those seen in 2004 and 2005 quite comfortably. As far as expectations are concerned, the whole service sector scored just under 75 on the same scale - a bullish forecast compared with 2005 and 2006. Well over half the respondents expected business activity levels to be higher by March 2008. This is broadly good news for the Central London office market's future. The volume of space under construction has risen markedly this quarter by some 2 million sq. ft. The City is particularly in the throes of a building boom, this is apparent from the highly visible schemes taking shape on the skyline with projects such as St Martins' 1 Fifty Cheapside opposite Paternoster Square or British Land's Broadgate tower.

Vacancy rates continued to fall in the first quarter of 2007 and upward pressure on rents remains strong, particularly in the West End where available Grade A space is very limited. The Central London investment market has been strong for a number of years and the market has seen substantial compression of yields. Prime yields have fallen over 200 basis points in the main markets in the last three years, as the market has attracted record levels of investment. Ongoing analysis of the achieved yields for the whole of the Central London office investment market shows a downward trend, with the average falling from 8% at the end of 2003 to around 5% at present. However, this trend has started to level off.

Figure 1 shows the monthly average office yield achieved since September 2003. From the middle of 2006 onwards the trend has been flat. Although the graph shows other short periods where this has happened, the trend has always continued downwards thereafter. On this occasion however, there appear to be signs of upward pressure with two important caveats: 1) These are average yields - i.e. no account is being taken of the quality of the investment. 2) Office investment transactions across the whole of Central London include many cheaper and less prestigious markets.

Nevertheless, this is an analysis of around 60 million sq. ft. of investment deals on FOCUS, representing some £37 billion of investment. At the start of 2007, many respected landlords and commentators are speculating on the timescale for a cooling of the market. This provides evidence that such a slowing down may already be underway.

THE CITY EC1 – EC4 Q1 2007

The largest transaction was the pre-letting of 223,000 sq. ft. at 201 Bishopsgate by international lawyers Mayer, Brown, Rowe and Maw.

Jones Lang LaSalle and Knight Frank advised British Land. 201 Bishopsgate is under construction and due for completion in early 2008.

Insurers Thomas Miller took 75,000 sq. ft. of secondhand space at Saracens Head House in Fenchurch Street. In Paternoster Square, Merrill Lynch has taken 60,000 sq. ft . on a sub-lease from Goldman Sachs.

In the City core, ING Real Estate has taken 45,000 sq. ft. at Morley Fund Management's 25 Copthall Avenue, joining Schneider Trading and Fox Pitt Kelton.

The largest space available for the second quarter in a row is 160,000 sq. ft. at London Merchant Securities' Angel Centre on the northern fringes of the City as well as 116,000 sq. ft. at 133 Houndsditch. Moving closer to the core there is 86,000 sq. ft. at City Place House on Basinghall Street and 83,000 sq. ft. at Old Billingsgate market on Lower Thames Street. The largest tranche of secondhand space is at Senator House on Queen Victoria Street, where 90,000 sq. ft and  83,000 sq. ft. available at Beaufort House on the eastern edge of the City and 75,000 sq. ft. at 90 Bishopsgate. FOCUS identifies some 6.6 million sq. ft. under construction including British Land's Broadgate Tower, 201 Bishopsgate, which will deliver over 800,000 sq. ft. Despite the withdrawal of Beacon Capital Partners, the joint venture partner, Land Securities' New Change scheme opposite St Paul's will deliver 330,000 sq. ft. of offices in a mixed use scheme.

Pressure on City rents continued in the first quarter, pushing them upwards further. Prime rents are heading for £60 per sq. ft. and incentives are waning fast. Average rents for new or refurbished space stand at £32.80 per sq. ft. while secondhand space comes in at £24.50 per sq. ft.

THE WEST END W1 – SW1 Q1 2007

The largest transaction saw utility company, EDF Trading take 50,000 sq. ft. at Land Securities' Cardinal Place in Victoria. Elsewhere in Victoria, Newswitch took 23,000 sq. ft. at Victoria Central on Buckingham Palace Road on a sublease from the Telegraph Group. Atisreal acted for the landlord.

In Regent Street, Avanta took 28,500 sq. ft. from Morley Fund Management at number 271. While at Clarebell House in Cork Street, Pollen Estates has purchased 27,820 sq. ft. of space from Arlington.

Close by at 23-25 Maddox Street, Conde Nast Publications took 25,995 sq. ft. Also in the core, Providence Equity Partners took the entire 23,000 sq. ft. building at 25-27 St George Street from Wolfe Property Services.

For the first time in many months the largest space available this quarter is not in Victoria, demonstrating the progress made in this particular submarket. The largest new space available is at Iveagh House in St James' Square where some 70,000 sq. ft. There is also 60,000 sq. ft. on offer at 4 Victoria Street while in Great Portland Street there is 62,000 sq. ft. on the market. 70,000 sq. ft. is available at Berkeley Square House and this is the largest tranche of secondhand space available. At 77 Grosvenor Street 58,000 sq.ft. is on the market and  57,000 sq. ft. on Mortimore Street. 45,000sq. ft. is available at 27 Wigmore. The development pipeline in the West End shows over 1 million sq. ft. under construction. This includes the 120,000 sq. ft. Delancey scheme at 40 Portland Square and London Merchant Securities' Qube off Tottenham Court Road.

Rents in the core West End have been rising fast with £120 per sq. ft. being reported in Hanover Square. Prime rental levels are currently approaching £100 per sq. ft. in Mayfair and St James'. Average rents for new or refurbished space stand at £44 per sq. ft.

MIDTOWN WC1-WC2 Q1 2007

At Tishman Speyers' Centrium on Kingsway, Babson Capital Europe Ltd pre-let 25,000 sq. ft. of space Elsewhere at John Kirk House on John Street, the publisher, Loot, took 12,000 sq. ft. on a sub-lease from the Daily Mail Group. At Standard Life's 55 New Oxford Street, Twentieth Century Fox has taken 10,450 sq. ft. of first and second floor office space.

The Midtown area is short of large new or refurbished space. Availability includes 53,000 sq. ft. available at New Mercury House on Red Lion Square and 35,000 sq. ft. at 1 Strand. There is some larger secondhand space available. The largest of which is available at Serjeants Inn amounting to 83,000 sq. ft. and at 85 Fleet Street a further 82,000 sq. ft. 222 Grays Inn Road has 76,000 sq. ft. still on the market, while 53 Chancery Lane has 47,000 sq. ft. There is also 32,000 sq. ft. available at 27 Chancery Lane and 27,000 sq. ft. at 50 Chancery Lane. The development pipeline shows over 1.3 million sq. ft. under construction or refurbishment. This includes Castlemores' 40 Holborn Viaduct at 178,000 sq. ft. and Capital & Counties' 190 Strand with 250,000 sq. ft., as well as Centrium and the continuing developments in Fetter Lane.

Prime rents in Midtown remain at around £47.50 per sq. ft. up from £40 at the end of 2005. Average rents for new or refurbished space stand at £33.80 per sq. ft. with secondhand space available on average at £29.20 per sq. ft.

DOCKLANDS E14 AND SOUTH BANK SE1 – SE11 Q1 2007

DOCKLANDS

The largest deals saw 23,000 sq. ft. exchange hands in Harbour Exchange Square Elsewhere recruitment company, Michael Page International, took 6,458 sq. ft. on the 28th-floor of 1 Canada Square. Availability in Docklands has fallen consistently over the past two years as products brought to the market speculatively were taken up. The largest single unit of new space available is at 40 Bank Street where 330,000 sq. ft. is available. 137,000 sq. ft. remains available at 1 Canada square The development pipeline at Canary wharf having paused for breath, currently stands around 325,000 sq. ft. under construction or under refurbishment, including 120,000 sq. ft. at Marsh Wall and a further 120,000 sq. ft. at Discovery Dock West.

Prime rents in Docklands stand at around £45 per sq. ft. a rise of some 20% on the year.

South bank (SE1 & SE11)

The impressive bulk of the Bankside development dominates Southwark Street. More London colours the view south from the City and the "Shard of Glass" has yet to break ground. As time passes the South Bank market becomes ever stronger and gains critical mass.

Take-up in the first quarter of 2007 was 230,000 sq. ft. around the quarterly average for the market. Larger transactions included Donovan Data Systems Ltd taking 35,049 sq. ft. from Land Securities at 110 Southwark Street.

Elsewhere at Europoint on Lavington Street, Cnet Networks took 25,500 sq. ft. At New Bridgewater House on Great Suffolk Street, Breast Cancer Care took 23,705 sq. ft. from landlord Overcourt.

As far as secondhand space is concerned 241,000 sq. ft. is available on Westminster Bridge Road and 52,000 sq. ft. at Minerva House through Prime rents on South Bank stand at around £42 per sq. ft. companies

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