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Property Market Report January 2007
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Property Market Report | Commercial Market |
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Contents Perhaps it is just the British way – to prophesy gloom and despondency when things are going so well. As the City occupier market comes out of the doldrums, all guns blazing, there is already concern from some quarters that the end of the upturn is not far away. Whilst the City bonuses spiral upwards and the car parks fill up with sports cars, some are saying that the champagne glasses are half empty. One place that has become fuller over the year is, of course, the Gherkin which ended the year with asking rents of £700 sqm. Furthermore, the four month race to become the new owner has been won by the German listed property company IVG Asticus for £600m. 30 St Mary Axe, EC3, to give it its proper title was put on the market by Swiss Re in September 2006 and attracted worldwide interest. It was a case of second time lucky for the German company as it narrowly missed out on the £290m sale of the Woolgate Exchange in 2005. The view from the Gherkin is spectacular and it is possible to look down on all the City towers. However, for how long this will be the case is debateable as the word on the City streets is the taller the better. Some commentators have said that within 10 years there could be 20 skyscrapers in the Capital – an increase of 11 on current figures. Others suggest that fewer than half the current skyscrapers on the drawing board will see the light of day. Either way things are definitely on the way up in London. Most agree that the Heron Tower landmark building will go ahead. Gerald Ronson, has committed to developing the 46-storey tower for opening in 2010. The other tower where there is consensus that it will happen is the “Shard of Glass” by London Bridge on the South Bank. Although outside the City boundaries, it will be more than visible from across the Thames at 310m in height, and as such, it will become Europe’s tallest building. It is also likely that Land Securities, Britain’s largest quoted property company, will build its 36 storey building in Fenchurch Street as it has now secured planning permission. The usual debate as to the sustainability or otherwise of the market is currently being won by the optimists. Thus the headlong rush into building bigger and better may result in the boom and bust cycles of previous years. The City market was severely hit in the early 1990’s on the back of the late 1980’s development boom and the early 2000’s were tough following the boom of the late 1990’s. As the market moves further into the second half of this decade, is history likely to repeat itself? Scratching below the surface, the economic signs seem good. The city autumnal reports of 2006, suggest higher expectation of take ups, real rental growth, higher volumes of transactions including more pre-letting activity and the banking sector becoming more prevalent, and this looks set to continue in 2007. Developer confidence is high and seems to be increasing as well. More space went under construction in the City in quarter 3 than in the previous 2 quarters. Most of it is speculative including 125 Old Broad Street EC2, the largest speculative start in Quarter 3. There are no signs that the high number of speculative starts will result in flooding the market and oversupply. The soothsayers for 2007 offices are bullish. Agents forecast that rents in the City will rise to £62.50 per sq ft by the end of 2007 as compared to the competition in the Docklands forecast to be at £40 to £50 per sq ft within the next 2 years. From the most up to date figures to hand availability rates are falling everywhere and currently stand at 7.5% for Central London. The tightening of availability rates has put pressure on asking rents, which have continued to rise. The City core, dominant in London development has over 400,000 sqm under construction and work is scheduled to start on an additional 383,000 sq m by the end of 2007. This is in contrast to the West End where a fall in space under construction and new/refurbished space has been seen indicating that good quality space is being absorbed quickly, leading to a shortage of supply. The pace seems to be quickening. Three of the railway stations are to provide competion for traditional office markets. Developer applications are to be invited next year for the redevelopment of Waterloo station; British Land and Chelsfield, in partnership with Morley, have been short-listed for the redevelopment of Euston station, with a final decision due next year, and work is due to start late next year on Argent's £2bn King's Cross regeneration. Back to topThe November 2006 Ingleby Trice Kennard City Floorspace Survey showed a take up of 29,079 sqm, some 25% less than the same month last year. However, this was the exception as 2006 proved to be a very good year for lettings with a predicted year end total of 500,000 sqm, 30% up on 2005. Total availability in the City at the end of November was 634,761 sqm, only slightly more than at the same time last year but still well below the market in 2003 when availability exceeded 1 million sqm. However, it shouldn’t be forgotten that we are a long way from the position at the last peak in late 2000 when availability was less than 25% of current levels.
There is likely to be over 400,000 sqm of new space coming onto the market within the City boundary over the next three years offering a significant challenge for letting agents as over 70% is available to let. The hope is that the financial sector will continue to grow and expand so creating additional requirements for large areas of new space in the City. Commentators think Canary Wharf will provide less competition this time around due to a lack of new buildings in the Docklands. However, watch out for competition from other parts of the capital, such as Paddington, Kings Cross, Euston and the South Bank. As the year drew to a close, evidence that the City is now the world’s leading location for banking and finance was provided by the largest requirement for years being revealed, as JP Morgan seek 93,000 sqm for a new HQ in the City. This comes on top of research from Jones Lang Lasalle in the autumn indicating that there were over 160 requirements for space in the City, of which half a dozen were in excess of 20,000 sqm. It has taken over four years, but 2006 finally saw rents rising across the board with lettings of new grade A space up to £645 sqm by the end of the year and asking rents up to £700 sqm. This represents increases of 10% to 15% with more to come if agents’ predictions are to be believed. There has also been a reduction in rent free periods to 18 months or less, down from 24 months a year ago. January and February saw lettings at Moorhouse 119 London Wall EC2 at £565 sqm with asking rents on the remaining space being increased to £590 sqm. This was achieved in March when the top three floors were let, but with an 18 month rent free period and breaks at five and ten years The first quarter also saw a letting at 10 Gresham Street in March to Lloyds TSB at £565 sqm. April saw Land Securities finally securing a pre let at One Wood Street EC2 after the disappointment of losing a tenant for the building last year to Canary Wharf. The building to be completed in 2007 was let to lawyers Eversheds at a rent rumoured to be £515 sqm. This quarter also saw a further letting at Moorhouse EC4 at £590 sqm, some 5% above the earlier lettings in the year. June saw terms agreed for another pre let at Milton Gate, Moor Lane EC2, This is a mid 1980’s building being refurbished by UBS and Exemplar after being vacant for four years and purchased in 2005 for £50 million. The rent agreed was £485 sqm for 18,500 sqm which seemed to confirm the general pattern of refurbished buildings being some 15 to 20% below the rents of large new build schemes. Unfortunately, the tenant pulled out later in the year but with construction works continuing the owners are obviously hoping for further interest in the near future. June saw asking rents at 99 Bishopsgate EC2, the tower rebuilt after the IRA bomb in 1993, increased to a cycle high of £645 sqm. Of interest to historians, the original building on this site set a cycle high back in 1982 when it was let at £345 sqm in late 1982 to a foreign bank. In August, part of the new Scottish Widows and Teachers development just south of London Wall, 5 Aldermanbury Square EC2, was let to Fortis Bank at a rumoured rent of £590 sqm. In August floors 24 to 26 at 99 Bishopsgate, were let at £625 sqm and a further 1,880 sqm were let at Moorhouse EC2 at the highest rent in this cycle of £645 sqm. The end of this quarter saw asking rents for the best space at the Gherkin increased to £700 sqm. The last quarter continued to show rental growth with further space at 5 Aldermanbury Square EC2 rumoured to be let at £645 sqm on the upper floors and £590 sqm on the lower floors. Condor House, 5-14 St Paul’s Churchyard EC4, a 2005 Greycoats development, saw £620 sqm achieved. A large part of the growth in demand shown in the take up figures has been driven by the continuing strong financial sector as evidenced by the highly publicised recent round of City bonuses. Combining this with the shortage of large Grade A units has resulted in the sharp increase in rental values, the first seen for many years. Retail has traditionally played second fiddle to offices in the City with occupiers forced to make do and mend with poorly configured shops; 90% of units are smaller than 100 sqm. Given that Cheapside resembles a building site at present, then their supply is even tighter. Extra space is being offered as part of larger office space, most notably Legal and General’s Walbrook Square in EC4 (Bucklersbury House) will incorporate almost 9,300 sqm of shops and restaurants. Other schemes include St Martin’s Property’s 2,325 sqm of retail at 150 Cheapside EC4 and a similar footage at Mitsubishi’s Bow Bells House, EC4. The redevelopment of Morley’s block at Gracechurch Street EC3 will release a further 4,650 sqm. However, what the City has lacked for a long time is a stand-alone retail development and the Land Securities’ and Beacon Capital Partner’s 20,500 sqm One New Change EC4, with shops around 1,850 sqm offers such a rare facility in the City. Creating a viable, sustainable centre is difficult because of competition along the Tube in Canary Wharf and the West End. However the pay off is improved retail mix and fewer service occupiers. Property analysts consider that the mix of the Legal & General scheme, complemented by offices, and the Land Securities scheme offering a more conventional shopping centre will satisfy demand without leading to oversupply. Certainly the will is there for 6 day trading centre and the City of London has commissioned CBRE to examine the viability of extending retail nodes that have formed around stations and possibly creating a “high street” from Moorgate to St Pauls. Interestingly in the light of the above, Redevco UK is seeking to redevelop 120 Moorgate EC2 in 2008, a site it purchased in October 2004 for £46m. If given planning approval, the proposed 14,500 sqm mixed use scheme including 3,000 sqm of retail on the ground floor with 9,625 sqm of offices above will according to the MD, form a “gateway to the City.” Another bumper year with City sales estimated to be over £10 billion representing over 60% of the total Central London market. This is an increase of over 20% on 2005 but was not reflected across the UK as overall investment in UK property fell by 15%. Such is the weight of money looking to buy, that prime office yields have been driven down to 4.25-4.5% from the 5% last year. 1 King William Street EC4 recently sold for around £85m, yielding 4.25% and evidence from Jones Lang LaSalle indicates that there are more deals, bigger deals and lower yields. There is some evidence of profit taking although City commentators consider this relates more to private investors on the “first in first out” principle rather than company bidders. However, the yield compression flies in the face of interest rates with two base rate increases and 5 year swap rates at over 5% for the last half of the year as compared to 4.6% at the start of 2006. The year started with reports of the sale of 100 Wood Street EC2 in January at £140m some £15m above the asking price, a definite sign of things to come. This represented an initial yield of 5%. In February, an investment in the western fringe of the City at 1-3 Dorset Rise EC4 sold for more than £80m to show a yield of 6.85%. March saw a flurry of activity with the closure of the Stamp Duty Land Tax (SDLT) loophole that allowed Jersey Property Unit Trusts (JPUT) to avoid paying SDLT. Sales included the UK’s largest ever single asset sale with Plantation Place, Great Tower Street EC3, held in a JPUT, selling to a consortium for £527m at a yield of approximately 4.85%. March also saw a 4.25% initial yield at 100 Ludgate Hill EC4 although one floor was vacant. This was a fiercely contested sale with a number of well known names bidding. April saw Resolution Property complete its purchase of the14,400 sqm Senator House, Queen Victoria Street EC4 at £104m. The yield of 6.5% reflected the purchasers plans to refurbish the building. This quarter also saw two significant sales by German open ended funds in EC2. Firstly, the Woolgate Exchange, Basinghall Street sold at £325m reflecting a yield around 5% and secondly Milton and Shire Houses, Silk Street sold for £350m. May saw the lowest yield so far in the cycle at 4.5% with the sale of 10 Queen Street Place EC4 at £145m. June saw a partly let investment in the western fringe of the City at 165 Fleet Street EC4 sell at £55m with an estimated equivalent yield of 4.8% off an estimated average rental value of £410 sqm. A further sale in this part of the City took place at 1 Fetter Lane EC4 at £68m showing an initial yield below 4.5%. July saw the sale of 33 Old Broad Street EC2 to a private investment group to show a reported yield of 4%. There was also confirmation of the sale of the long leasehold interest in Cannon Bridge House, Dowgate Hill EC4 at an initial yield of 6.2%. August saw 88 Wood Street EC2 go under offer at £230m showing a yield of over 5%, and 1 King William Street EC4 was sold for more than £80m at a yield below 4.5%. September saw 41 Lothbury EC2 reported as being sold for in excess of £115m at a yield of below 4.5%, not surprising given it was redeveloped in 2004 and adjoins the Bank of England. There were no signs of a slowdown in the investment market at the start of the last quarter as £800m of property came to the market in the first week of October. This included the early 1980’s office development at Cutlers Gardens E1 that was put under offer later in the month at £410m showing a 5.25% yield for the 55,750sqm development. 99 Gresham Street EC2, a 9,750 sqm building, sold in November for £95m at a yield of 4.25%. However, as the year drew to a close it was the Gherkin again that made the news. A sale of close to £600m for the Swiss Re HQ represented a yield at below 4.5%. Whilst it is certainly does seem appropriate in the current market climate that Difa’s proposed 288m Bishopgate Tower project has been nicknamed the “Helter-skelter,” most agents are more optimistic – at least concerning the next 2 years. The view is that the problems of early 1990’s were specific to that time and the recent development decisions are better researched with developers releasing property on the occupational up-cycle, ahead of the “curve.” According to agency heads and asset managers another difference is that in the late 1980’s too much funding was chasing the less experienced developers whereas today the market landscape is dominated by more established companies. According to GVA’s published figures, office schemes under construction in the City total over 700,000 sqm, (this appears to include developments just outside the City boundary, including the South Bank) and all these will be built within this cycle. In the City itself over 400,000 sqm are in the course of construction. Office developments throughout Central London with planning consent now total over 1.75 million sqm. There is potential for oversupply; however the realistic view is that many of the proposed schemes may not be built and of the consented schemes less than 50% are likely to be built in this cycle. For office schemes with no planning application submitted (865,000 sqm), the likely figure is less than 5% and for office schemes with planning permission applied for (410,000 sqm) less than 20%. All in all, there seems to be some restraint in the market. A notable example of where plans have been scrapped is the Minerva’s 1m sq ft designed tower at Houndsditch EC3. What is now proposed is a scheme just over half the size of the tower. Whilst this could reflect a lack of confidence in the occupier market, one factor that property experts have alluded to is the lower level of competition from the Docklands, very prevalent in the 1990’s. This could have a dual effect of softening the blow if a slowdown in tenant demand does occur in a few years time and make tower schemes more feasible. Therefore, there is a view that there are strong hopes for the big schemes even if they do compete with each other. However, although the original Canary Wharf is close to be being fully developed other developments such as the adjoining Wood Wharf are waiting in the wings. Whilst Minerva may have decided that hundreds of feet above Houndsditch on spec may be inadvisable, others are less hesitant. British Land has the 55,850 sqm Leadenhall building EC3 scheduled for completion in 2010 and began work on the 38,100 sqm Bishopsgate Tower, 201 Bishopsgate EC2 and the similarly sized Broadgate Tower EC2. If you include the 11,800 sqm Ludgate West, 14 Farringdon Street EC4 and 51,000 sqm Ropemaker Place EC2, British Land will bring approximately 180,000 sqm to the market within the next 5 years. The Mitsubishi 18,600 sqm redevelopment of Bow Bells House EC4 is due for completion next year along with Ludgate West. As the New Year approaches, even Rothschild in New Court has decided to build a 16-storey replacement of Newer Court, which in turn will replace its historic New Court in 2007. Other developments that made the headlines in 2006 included the controversial redevelopment of the General Market Building at Smithfield Market EC1 which received consent in May for just over 39,000 sqm of mainly office space. Given its location in the City fringe and on the line of Crossrail it is unlikely to be built in the near future. May saw Legal and General announcing a large office and retail scheme on the site of Bucklesbury House, Queen Victoria Street EC4, to be called Walbrook Square. With the demise of Minerva’s scheme at Houndsditch this is the largest proposed development in the City at 92,900 sqm. At the same time, Land Securities announced proposals to develop more than 46,450 sqm on a site adjoining the Old Bailey presently occupied by a pair of 1950’s buildings. The year ended with British Land announcing their vision for the future of their Broadgate estate. They are envisaging increasing the overall floorspace by demolishing some of the low rise buildings and replacing them with more high rise development. As the earliest leases expire in 2011 this is something for the future. In terms of land values the start of the year saw the Ropemaker Place EC2 development site for sale at £100m. However, it was finally sold in March for £130m to British Land representing £2,800 sqm on a proposed development of 46,500 sqm. April saw two City sites sold to a consortium of Stanhope and Schroders at 70 Mark Lane EC3 and 8-10 Moorgate EC2 for £60m. With existing planning permissions for a total of approximately 28,000 sqm this analyses to £2,150 sqm NIA. In May an 7,900 sqm development scheme at Tower House, 38-40 Trinity Square EC3 sold for £20m representing just over £2,500 sqm. In September it was reported that 30 Crown Place EC2 was likely to be sold for around £61m. The site has planning permission for 18,580 sqm which translates to just under £3,300 sqm. October saw Land Securities enter into a joint venture by way of selling a half share in its development proposals for One New Change EC4, excluding any development costs. For the 52,000 sqm scheme this represents just over £300 sqm. Conclusion More of the same in 2007 is probably the phrase most apt, particularly about property rental growth and market buoyancy. Foreign investment has allowed new schemes to come forward and redevelopment of existing buildings is widespread, some more famous and historic than others. The former headquarters of the Midland Bank, the Grade 2 listed building of 27-35 Poultry, designed by Lutyens was sold to a former Russian Deputy Finance Minister for development. This was the setting for the Bond film Goldfinger. It is one of several City buildings and streets used for film locations including the Lloyds insurance building for the recent Spider Man film. The plans for the Midland Bank followed a string of plans to turn high profile historic buildings into luxury hotels or serviced luxury apartment blocks. The most recent example is the £110 million sale of the former Port of London Authority building in Trinity Square where an entrepreneur plans to spend £250m on converting it into a hotel. Of course Trinity Square is spitting distance from the most successful tower in London and the one that shares its name with the capital - “the” Tower of London. The Unesco world heritage committee have expressed “great concern” about the new buildings planned to loom over it. However the Tower has seen off all of the competition over the years. As seen from the Gherkin, the former NatWest Tower, Barclays at Lombard Street and the Stock Exchange Tower, for every new tower that goes up, one tends to come down. As in most things in life, including skyscrapers and city markets, quality will win out in the end and only the best will remain standing. |
