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Bigger hedge funds set to move out of Mayfair and St. James’s, says Jones Lang LaSalle

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The hedge fund industry may be broadly perceived to be suffering from the global credit crunch and associated market turbulence, but evidence from London’s property market suggests that ma

The hedge fund industry may be broadly perceived to be suffering from the global credit crunch and associated market turbulence, but evidence from London’s property market suggests that many managers are continuing to enjoy solid returns and profits, according to the latest Hedge Funds Update report from global property manager Jones Lang LaSalle.

‘Delving beneath the news headlines, our research shows that whilst some funds have found themselves in considerable trouble, a substantial portion of the sector has either been extremely profitable or delivering positive returns,’ says George Roberts, a director of the Jones Lang LaSalle agency team covering London’s West End.

‘Globally, the levels of assets under management moving into the industry have declined, as have numbers of start-ups. Today’s more cautious investor strategy is resulting in the barriers to entry for new funds being raised, and although seed capital is still available, many institutional investors are favouring funds with proven track records.’

Today 52 per cent of take-up in the core Mayfair and St James’s markets comes from the financial sector, with hedge funds accounting for 22 per cent of this demand.

‘Supply is expected to remain tight within the core West End,’ says Adrian Crooks, another director in the West End agency team said. ‘More than three million square feet are under construction across the West End but only 15 per cent of that is in the core [area].

‘Any further increases in supply are more likely to derive from tenants than developers. However, only 22 per cent of the space on the market derives from financial occupiers and just 6 per cent from hedge funds.’

Jones Lang LaSalle says movement of hedge fund managers is being driven by a combination of choice, flexibility and cost, pushing larger fund managers out of the core West End area to high-specification buildings on shorter lease lengths, as typified by recent deals involving Brevan Howard and DE Shaw moving to Baker Street.

In addition, fund managers are taking a wait and see approach to rents, the property manager says. Although Ziff Brothers Investments and GLG have concluded deals at GBP110 per square foot at 40 Portman Square and 1 Curzon Street respectively, there has been a distinct decline in hedge fund leasing transactions at those levels.

‘The sector remains robust in challenging economic times, an environment that is driving maturity in the sector,’ Roberts says. ‘As funds grow we expect that although Mayfair and St James’s will remain the focal point of hedge fund activity, it will increasingly be the smaller, less institutionally influenced funds with lower sensitivity to technological needs that will populate these markets.

‘The outer areas of the West End and even the City will be the beneficiaries of the expansion of some of the larger fund managers as these areas are better able to address the three core needs of choice, flexibility and cost.’

Jones Lang LaSalle, which has some 170 offices worldwide and operates in more than 60 countries, provides property and corporate facility management services to a global portfolio totalling around 1.2 billion square feet and posted revenue of USD2.7bn last year. Its LaSalle Investment Management business is one of the world’s largest real estate asset managers with some USD50bn in assets under management.

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