This is according to RICS' latest UK Commercial Property Survey.
Rental expectations rose dramatically for London offices moving above zero for the first time since Q4 2007 as available space declined for the second consecutive quarter. This is the first time more RICS surveyors have reported an anticipated rise in rents for two years. The positive net balance of 57% (compared with the previous reading of zero) for central London office property was the biggest upward jump on record. This contrasts with the picture in the rest of the UK where available space is rising across all sectors and rental expectations are still negative.
Commercial property lettings activity continued to pick up across office and industrial property for the second consecutive quarter, although investment demand has moderated somewhat outside the London metropolitan area. The retail sector continues to languish, particularly in the capital where rising available space continues to weigh on rental expectations.
Confidence in the outlook for lettings increased, but sentiment was slightly less buoyant than at the end of the fourth quarter of 2009. Some surveyors voiced concerns over the impact on regional lettings activity of public sector employment cuts following the upcoming election.
Also, there is a changing balance of power between landlords and tenants. Growth in inducements being offered by landlords to secure a letting has moderated across all regions and sectors. In central London, 45 percent more surveyors reported a fall rather than a rise in inducements for offices compared to 9 percent in the fourth quarter.
Commenting, Oliver Gilmartin, RICS senior economist said: "The latest results suggest that a still modest recovery in lettings demand has greatly lifted rental expectations for London offices where development has floundered in recent years due to a dearth in development finance.
"There are some signs that a lower pound and a gradual rebalancing of the UK economy towards greater export activity is starting to feed through into industrial lettings activity most notably in London and the South. Office lettings activity continues to rise modestly across the country although surveyors still remain cautious. Indeed, there are worries that some regional office markets could suffer a setback as public sector employment cuts weigh on demand, whoever wins next month's election.
"Growth in investment transaction activity continued in Q1 albeit at a slower pace outside the capital. The stronger the price gains this year the less scope for further rises in 2011 without a corresponding rental recovery. Indeed, the investment recovery may be reined in by rising borrowing costs in the event of a hung parliament."
