London's Office Envy
In Mayfair District

Hedge funds in London are locked in bidding wars. But their targets this time aren't stocks and bonds, or even star traders. It is office space.

The proliferation of hedge funds and private-equity firms has sent rents skyrocketing and vacancy rates plunging in London's Mayfair district -- home to many of London's largest and best-known financial firms. Some buildings are being snapped up even before they are finished.

"The market is moving very quickly," says Patrick O'Keeffe, a partner at GVA Saxon Law, a commercial-property firm that has advised on more than 75 hedge-fund related deals. He says two recent Mayfair properties exceeded $200 a square foot.

In the past year, prime rents have jumped 22% to nearly $180 a square foot for the best space in Mayfair, real-estate firm CB Richard Ellis Group said in a recent report. Indeed, occupancy costs, which include rent, local taxes and service charges, in London's West End, where Mayfair is located, top CB Richard Ellis's Top 50 most expensive markets in the world at $212-a-square foot annually.

Occupancy costs are well ahead of Tokyo's Inner Central district, which had long been considered the world's most pricey real-estate market. Tokyo's Inner Central was fetching $146 a square foot annually.

Midtown Manhattan, the most expensive commercial-real-estate market in the U.S., ranked just 24th on the list at $62 a square foot, eclipsed by Hong Kong, India's Mumbai and even Aberdeen, Scotland.

In London, residential prices are soaring along with commercial prices. Newly minted hedge-fund traders, among others, are helping push up property prices in many of London's poshest residential neighborhoods.

The homes of London's Embassy Row, once an enclave for diplomats, now is a haven for hedge-fund traders. Two years ago, a trust linked to Pierre Lagrange, who represents the "L" in giant hedge fund GLG Partners LP, paid £19 million, or about $35 million at the time, to acquire a long lease on a wide-fronted house once occupied by a former Soviet government agency, property records show.

Noam Gottesman, who represents the first "G" in GLG and is a former Goldman Sachs Group Inc. private-client banker, also owns a home on the same street, say people familiar with the situation.

Of course, London real estate long has been high-priced. And the party could crash amid a market meltdown or large scandal involving hedge funds. Roughly 1,300 hedge funds have liquidated in the past two years, according to Hedge Fund Research.

Still, this rise in private money has expanded London's financial base. Some forecasters such as CB Richard Ellis project further growth. So scarce is space that some tenants are locking it up even before it hits the market.

That is the tack the new boutique investment bank Perella Weinberg Partners took at 20 Grafton Street in the Mayfair section, say real-estate agents involved in the deal. By the time rival real-estate agents turned up for the launch party, they knew the space was off the market.

The reason: Perella Weinberg had swooped in and agreed to lease the entire building even though it didn't need all the space, say the agents. Rent for some of the building's upper floors fetched more than £90 a square foot, or about $166 at then-exchange rates. Perella Weinberg has subleased some of the lower floors.

The stampede for space comes as hedge funds are proliferating in number and expanding beachheads. European-based hedge funds manage $185 billion of $1.34 trillion in hedge-fund assets, according to Hedge Fund Research. Of that, about $140 billion is managed out of the United Kingdom, most from new office buildings and period-style townhouses in Mayfair.

Last year, Fortress Investment Group LLC and Apollo Management bid against each other for space on George Street, says GVA Saxon Law's Mr. O'Keeffe. Apollo acquired the space for about £95 a square foot, or roughly $175 at then-exchange rates.

Fortress took a property at nearby Saville Row after outbidding another hedge fund.

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