A SIX MONTHLY REVIEW AS AT 1 MAY 1982 OF THE PROPERTY MARKET – CITY OF LONDON

Prepared at 4 May 1982 by District Valuer and Valuation Officer City of London

THE PERIOD GENERALLY

On 1 November the FT Property Share Index stood at 415.08 and at the close of business yesterday at 429.28. Between November and April property shares performed somewhat erratically, several times passing the 460 mark. After the Falklands invasion a month ago values dropped markedly and are still well below the pre-invasion level. The All Share Index on the other hand rose fairly steadily over the first five months from 286.30 on 1 November and had recovered completely from its post-invasion fall to close at 328.09 yesterday. The London Clearing Banks base lending rate started the period at 15½% and then fell by half a point each month to reach 13% in March, where it stands today.

Despite the steady fall in interest rates, signs of an improvement in the economy and a favourable Budget, property shares fell by nearly 73 points over the past year whereas the All Share Index dropped by only 4 points. The heavy discount on assets has not resulted in either purchases of property companies or significant purchases of property shares by institutions and the spate of rights issues following Prudential’s proposed sale of Central Cross in the West End for £45m – allegedly an exercise in portfolio management – add weight to the arguments of those who consider that property values are set to fall. In any event it seems certain that these matters together with the as yet unknown repercussions of the Falklands affair will ensure that the property world will be wondering what is going on for some little time yet.

In the City, although rental values remained static in some districts they did not fall; in the central area they continued to rise. The institutions’ demand for City property continued unabated and yields remained firm at the low levels of recent years.

Transactions reported to this office on Particulars Delivered during the 6 months ended 31 March were 22.4% higher than in the preceding half year – this increase is due in considerable part to sales of flats, particularly in the Barbican under the Right to Buy provisions of the Housing Act.

OFFICE FLOOR SPACE AND LETTINGS

The City floor space surveys published by Richard Saunders and Partners since June 1981 show that space available for letting (or for sale to occupiers) where vacant possession can be given within a year increased every month and at the end of March was the highest since January 1978. Although space let during October – March was nearly 3% less than during the preceding six months it exceeds by over 10% that let in the corresponding period last year.

Compared with the end of September, 12 units of 50/100,000 sq ft were available instead of 9 and although there were 23 more units on the market in the 5/50,000 sq ft bracket there was a small drop in the number available in sizes up to 5000 sq ft. Space available in all types of offices has increased since my last report but it is of interest that nearly all of this 326,000 sq ft increase (see table below) is to be found in buildings built or modernised since 1950 without air conditioning and in buildings in the central area with air conditioning. Although nearly 12,000,000 sq ft is available in post 1950 air conditioning buildings situated outside the Central area, this figure represents only a minute increase since September.

In December Richard Saunders said “there will need to be a marked increase in the general level of demand to absorb the present surplus and there are no such signs in the immediate future”. I have no reason to believe that they would think differently today.

RENT AND RENTAL TRENDS

Despite considerable efforts Standard Life/Greycoat have not let any part of their now completed 500,000 sq ft development at Cutlers Gardens on the NE edge of the City which has inflated the “space available” figures for the past year. It seems that whereas interest is being shown in smallish parts of the refurbished blocks where the rents will be £17-£18 per sq ft (£183 – 194 per sq metre) there is at present no real interest in the new buildings.

Once again there have been no lettings of prime office accommodation in the vicinity of the Bank of England where peak rents are to be expected but the ground floor banking hall and offices with basement storage/strong rooms at 1 Lombard Street oppose the Bank, for many years the HQ of Smiths Bank, was let to Middle East Bank late last year for £150,000 per annum. The property which is around 100 years old, was unmodernised and is now being refurbished by the new tenants. The rent paid represents about £33 per sq ft (£355 per sq metre) on the banking hall, £23 per sq ft (£248 per sq metre) on the offices. Having regard to this rent and to the movement of rents elsewhere in the central area I would expect over £28 per sq ft (£300 per sq metre) to be obtained now should prime accommodation become available.

Rents for top quality air conditioning offices in just off=peak positions are around £285 per sq metre and in Cannon Street (which is showing a significant improvement) and the remainder of the off-peak central area £250 per sq metre. Thus best quality modern air conditioning offices would fetch perhaps £180 per sq metre in Holborn and old unmodernised offices in Fleet Street about £80 per sq metre. Rents for smaller accommodation on the City’s eastern fringe would be say 5% higher. As always, top quality refurbished or reconstructed 19 th century (or earlier) small/medium sized buildings of the Haslemere type form their own special market because of their scarcity and let for unusually high rents.

Apart from 1 Lombard Street the most interesting transaction reported during the period was the pre-letting of GRE’s new banking/office building at 9-12 King Street EC2 to International Energy Bank for £475,000 per annum, which equates to £296 per sq metre (£27.50 per sq ft) for the main floors. This rent is unexpectedly high for a building to the west of Bank and outside the peak area. Nearer to but also to the west of Bank the Bank of Montreal is taking 100,000 sq ft of offices in Buklersbury House at around £23 per sq ft (£248) per sq metre. The State Street Bank and Trust Co of Boston has taken the new 10,315 sq ft office building at 12 Nicholas Lane EC4, just off Cannon Street, at close to £23.75 per sq ft (£256 per sq metre). Thai Farmers Bank took the 3 rd floor of 80 Cannon Street EC4 in December at a rent of £26 per sq ft (£280 per sq metre) the highest rent yet recorded on the south and less popular side of the street – the previous tenants were paying around £13.50 per sq ft (£145 per sq metre). The building was completed in 1976.

These examples of lettings, all to banks, show that despite the relatively weaker office market top quality modern space in good locations has had no trouble in commanding very high rents and that the steady increase in the number of foreign banks represented in the City has had a considerable effect on the letting market. On the other hand it was reported early this year that the American Chemical Bank was moving part of its clerical staff from the Strand to Cardiff and the Bank of America had asked St Quintin to report on the economics of decentralisation. Midland Bank’s International Division has taken offices in Bromley, the first I know of outside central London.

Rates are an increasingly crucial factor. In April the City’s rate rose from 117.0 to 143.0 p in the £ - an increase of 22.2% on top of a 23% rise last April. The Westminster rate rose from 116.0 to 141.6. By contrast, the other Boroughs adjoining the City – Camden, Hackney, Islington, Southward and Tower Hamlets increased their rate poundages by less than 10% - a marked change from the pattern of increases in recent years, although, of course, their poundages remain much higher than that of the City.

As to the future; there is now a great deal of surplus space available outside the central area and rents there – particularly in Holborn/Fleet Street – seem unlikely to show any general upward change unless and until demand picks up. In the central area where the demand created by foreign banks has such a strong influence on values the Falklands dispute could well have some effect. At the very least the restrictions placed on the Argentine banks in London could perhaps damage the City’s reputation as a banking centre and should serious hostilities break out it must be possible that banks not only from Argentina but also from a number of other South American countries may review their London operations.

OFFICE INVESTMENT AND SALES

The City’s importance as a world banking centre with its insurance, commodity and financial future markets has continued to attract investors to complete for the few investments that become available and very few transactions have been reported in the past six months. The most interesting, just reported, is the sale of Trafalgar House of 80 Cannon Street EC4, the “spidersweb” building next to Cannon Street Station (referred to in the last Section) to Pensman Nominees, the Nat West Bank Pension Fund, for £16.25m. This 37,500 sq ft block built some 6 years ago is fully let and the rents paid range from about £13.50 - £26. 50 Leadenhall Street EC3, a small 3750 sq ft office building with ground floor lock-up shop recently let to Phoenix Assurance was sold to the Royal National Pension Fund for Nurses for about £2m showing an initial yield just less than 4%.

An unusual deal reported in January concerned Fountain House, Fenchurch Street EC3 where the long leaseholders who pay a fixed rent of £21,350 pa until 2052 have agreed that Sunley Holdings will pay some £6.5m to refurbish the property in return for a share in the profit rental (said to be £1.1m in 1980) and an interest in the building which is worth about £14m to the leaseholders.

The majority of prime institutional acquisitions now are new developments ranging from forward funding to full-risk development. For some little time tenders have been highly competitive thus enhancing investment prospects but this state of affairs is unlikely to last much longer. Greycoat Estates and Standard Life are to develop a 38,000 sq ft office and shop building alongside Cutlers Gardens. The £5.75m scheme is to be funded by Standard who will take a 127 year lease from the Cutlers Company on completion and grant Greycoat an under-lease for the full term, sharing the income with them.

PLANNING AND DEVELOPMENTS

At the end of December the Corporation’s figures showed that nearly 4m sq ft gross floor space of offices was under construction and that planning permission existed for a further net increase of almost 1½m sq ft. There is also, of course, a considerable floor area planned or building just over the City’s northern/eastern boundaries and some schemes straddle the borders.

The signs are that the GLC’s commitment to restraint on office development which caused so much gloom last year has so far had little effect here because they seem to be regarding proposed schemes on their merits and the City is, after all, an unsuitable location for industry and housing. On 10 December, the City Corporation’s response to a request from the GLC for comments on the Interim Policy Guidelines recommended in its “Review of Office Policy in Central London” in general revealed little disagreement, except that whereas the Council indicated that throughout Central London office development would be considered acceptable where it was for a named occupier and necessary in the support of London’s economy the Corporation said that they were “anxious to foster all developments which will support and encourage the National economy and will look favourably on all office developments which will be occupied by the main financial activities of the City”.

On the same day the Court of Common Council accepted the report of its Planning Committee recommending the designation of eleven new conservation areas, doubling to 28% the portion of the City subject to this control. The Corporation’s policy with regard to conservation areas, which they appear to see as a means of exerting extra control on the kind of development which takes place rather than so as to preclude development, has caused controversy – the GLC in January turned down a planning application approved by the City’s Planning Committee within a new designated area describing it as “vandalism”. Problems have also occurred in the Little Britain area over Wimpey’s redevelopment proposals where in February the GLC designated a new conservation area to the north of the existing one and the Secretary of State later ordered a public inquiry.

For some 23 years Peter Palumbo has been acquiring 12 of the 13 freeholds (the other is owned by the Corporation) and 345 of the 348 leaseholds that make up the large block of property between Cheapside and Queen Victoria Street to the west of Mansion House and in December he applied for planning permission to redevelop the site with a 290ft office tower block situated in a large square with shops and pedestrian concourse below. Development could not begin until 1985/86 at the earliest but the proposal is extremely controversial and has already prompted considerable opposition by conservationists in particular.

In January the Corporation accepted the £22m bid of London and Edinburgh Investment Trust and S & W Berisford Ltd for the freehold of the old Billingsgate Market. The Secretary of State has now called in both the question of planning consent and the listed building consent and there will be an enquiry. In view of his decisions on other riverside sites recently the prospect of an architectural competition cannot be ruled out. In the meantime the Museum of London look likely to have much longer than they expected to carry out their excavation of the lorry park part of the site and the intriguing question as to whether or not the old fish market building will be severely damaged as a consequence of the turning off of the freezing plant and the melting of the basement permafrost could well be answered.

Work is now well under way to incorporate into the Old Royal Exchange a 17,000 sq ft structure for the London International Financial Futures Exchange which will provide accommodation for up to 6000 trades. Trading is expected to start in mid September.

THE BARBICAN

The Corporation’s Arts and Conference Centre was officially opened by the Queen early in March but the Barbican Theatre, which has been let to the Royal Shakespeare Company, will not open for public performances until this month. The project is reported to have cost £153m and its building to have involved some 2 million man/hours.

The sale of tenanted flats and other dwellings on the Barbican estate under the provisions of the Housing Act 1980 is continuing but as sales of vacant dwellings have for some time proved difficult to achieve the Corporation in March decided to rescind its November 1980 decision to cease short term lettings as flats etc become vacant.

CONCLUSION

The most recent RICT-FT Property Market Indicators poll of RICS firms and investing institutions carried out before the Falklands invasion shows that of those questioned 70% considered office rents to be rising and 30% that they were static. Last September only 47% thought they were rising and 6% that they were falling. A somewhat similar pattern emerges with regard to capital values, 59% thought them to be rising and 41% to be static; in September 41% felt they were rising and 6% falling.

Whereas in September all of those questioned thought investment yields were static only 82% took this view at the last count, the other 18% thought they were falling.

The unanimous vote in this recent poll was that activity in the investment market was static – last September 14% thought it to be rising.

This optimistic note does not accord with the generally less than enthusiastic tone of the various agents’ 1981 annual reports and one can only speculate as to what the results would have been had this exercise been carried out today.

For the reasons mentioned earlier in this report, it is clear that all is not well with the property market in general; in the City surplus space is increasing, rental growth where it occurs does not usually keep pace with inflation and the future is obscure. At best I would think that we are due for a standstill period except in the central area where rents of the best property should continue to rise at least in the short term, what happens after that could well depend on events a long way from the City’s boundaries.

District Valuer and Valuation Officer
City of London
4 May 1982