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Property Market Report January 2008
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Property Market Report | Commercial Market |
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Commercial Market Contents These comments were written in January 2008. To think that this time last year no one had heard of the phrases ‘credit crunch’ or ‘sub prime’, whereas they are now fast becoming clichés. Scholars read their history books and discovered that the last similar banking crisis was the Barings Crisis of 1890, triggered by losses on overseas investments; sounds familiar? The Bank of England subsequently bailed out Barings whereas Northern Rock has been taken over by the Government. The ‘debt crisis’ for want of a better cliché has engulfed the world, coming on the back of an unprecedented period of cheap credit. Debt has been the driver for huge amounts of commercial property investment in Central London over the past few years. As it is now more expensive and less available the buyers have suddenly got the upper hand. Those who sold at or before the summer peak are now in a position to pick up bargains as many property funds and institutions are being forced to sell properties to meet investor withdrawals. It all seemed so much brighter at the start of the year with the optimists still in the driving seat. There was good tenant demand fuelling further rental increases and cheap money was still available. The developers were also feeling confident with starts having already been made on a number of high profile buildings, with promises of more to come. Obviously no one could have foreseen the turmoil to come but the signs were there for trouble ahead. 5 year swap rates had steadily increased through 2006 and the end of the year had seen two base rate rises. These increases continued through the first part of 2007 with base rates at 5.75% and swap rates at 6.25% by early July. The property world continued to defy the increasing interest rates right through to June but come July and the final base rate rise the commentators were signalling the top of the market had been reached and the only way was down. The ‘dealers’ who bought with short term debt and hoped to quickly sell on for a healthy profit on the back of falling yields and increasing rents were about to get a shock. As market sentiment changed for the worse there was a return to the basic fundamentals of property investment; quality of building, location and tenant. The past 6 months have seen values falling significantly on the back of rising yields and growing uncertainty over future tenant demand as a number of requirements were put on ice. A number of properties on the market have seen significant price falls and some deals have had to be renegotiated as the market adjusts to the changing conditions. Those willing to rub their 2008 crystal balls have predicted that things may not be as bad as is generally expected. As it is common ground that base rates are now on a downward trend, this can only help both the occupier and investment markets, if it proves correct. It is certainly the case that LIBOR (the wholesale market interest rate) has been falling and swap rates have also seen significant falls in the past few months. In addition, as many institutions have now put in place procedures to prevent investors withdrawing funds, there may be significantly fewer forced sales than in the past, thereby preventing a downward spiral. However, money is still not readily available and loan to value ratios remain low. Back to topThe November 2007 Ingleby Trice Kennard City Floorspace Survey showed a take up of 44,188 sqm, over 50% more than the same month in 2006. However, in terms of the overall year it looks likely that 2007 will come in at approximately 10% below the record 2006 levels where take up exceeded 500,000 sqm, the highest year on record. Therefore, 2007 represented another excellent year for lettings and is likely to be similar to the previous highest year in 2000. Total availability in the City at the end of November was 629,789 sqm, similar to the position at the same time last year, and also in November 2005. However, it continues to run at well below the market in 2003 when availability exceeded 1 million sqm. However, in case you have forgotten, we continue to be a long way from the position at the last peak in late 2000 when availability was 140,000 sqm.
There is approximately 700,000 sqm of space under construction in the City at this time, 80% of which is speculative. It is likely that all of this space will become available by the end of 2009, representing nearly 150% of the current annual up take, although it should be borne in mind that this includes secondhand, as well as new space. Early in the year there were estimates that demand from named occupiers for space in the City exceeded 1 million sqm. For example, additional requirements in February and March came from Deutsche Bank with a 23,225 sqm and Macquarie Bank looking for 27,870 sqm (they subsequently put this on hold in August). However, towards the end of the year, a number of tenants pulled out of deals, with these mainly being from the financial sector. These have clearly been influenced by the ‘debt crisis’ and it will be interesting to see whether they appear again once they have re-assessed their situations in the post ‘credit crunch’ world. 2007 was a see saw one for JP Morgan as they started the year seeking space in the City, then appeared to be changing their mind and favouring Canary Wharf, but finally settled on the City with St Alphage House EC2. However, rating agency Fitch Ratings has been lured to Canary Wharf with a 30,000 sqm headquarters at 30 North Collanade E14; it is presently located in several buildings in the City.
The rise in rents first seen last year continued well into 2007 with current peak Grade A headline rents being in the region of £675 sqm to £700 sqm, although lettings of the top floors of new high rise buildings are likely to be nearer £750 sqm. Rent free periods have continued to fall with the average for a new building being 15 months. Although a number of deals have fallen through and many potential occupiers are adopting a wait and see policy, market sentiment is that rents may rise slightly in 2008, but at worst will remain static. January saw Moor House 119 London Wall EC2, a 2005 development by Hammersons, asking £700 sqm for 1,890 sqm on the 4th floor, an increase of £54 sqm on previous lettings. 30 St Mary Axe EC3 saw the highest rent this decade in the City at £700 sqm on the 24th floor. In February, Hammerson finally achieved full occupation at 99 Bishopsgate EC2 with the 23rd floor, refurbished in 2006, letting at £673 sqm to a law firm, Latham and Watkins. Close by the first letting at 201 Bishopsgate was announced at a rumoured rent of around £540 sqm. British Land in April said that space at their 2004 development 10 Exchange Square EC2 was under offer at £592 sqm and refurbished space at 155 Bishopsgate had attracted interest at similar levels. April also saw a new record rent, at 30 St Mary Axe EC3, when the 20th floor went under offer at £748 sqm. May and June saw a raft of EC4 lettings with the Midtown area seeing space at two new 2007 developments at 85 Fleet Street and 6 New Street Square going under offer at £540 sqm and £590 sqm. Closer to the centre of the City the 1st floor of 1,628 sqm at Condor House 5-14 St Paul’s Churchyard went under offer, with the asking rent being £618 sqm. 13,000 sqm went under offer at One New Change, the huge Land Securities development at the western end of Cheapside at a rumoured rent in excess of £645 sqm and the adjoining new development at Bow Bells House 1-5 Bread Street also saw its first letting with half the scheme being let to the Bank of Ireland for 15 years at a rent of around £700 sqm. July saw four floors of 4,710 sqm at the refurbished former Lloyds Bank building at 14 Cornhill EC3 reputedly going under offer at £645 sqm. August saw further space at Bow Bells House 1-5 Bread Street EC4 going under offer at a figure thought to be similar to the previous letting at £700 sqm. However, this quarter was dominated by news of what were the highest rents ever achieved in the City and they weren’t in the central area of the City, they were in Midtown. The Land Securities development at 6 New Street Square New Fetter Lane EC4 was rumoured to have achieved £780 sqm for three upper floors of 3,040 sqm, in a letting to a hedge fund relocating from the West End where similar accommodation would be nearer £1,290 sqm. This was followed by news of the top two floors of 1,859 sqm being let at £820 sqm. It is interesting to note that floors 1 to 7 had gone under offer back in May at £575 sqm. The final quarter of the year saw the Standard Life development at 1 Old Jewry EC2 letting 5,836 sqm of space on the 1st to 8th floors at a rumoured rent of £700 sqm. October saw the first reports of space going under offer at 125 Old Broad Street EC2, better known as the ‘London Stock Exchange’ in a previous life, but no rents were quoted. However, Hammersons had previously quoted asking rents of £590 sqm on the lower floors, £695 sqm on the middle floors, but had declined to comment on the top floors where I assume they will want rents in excess of £750 sqm. There were also reports in the last quarter of a pre let at St Botolphs House 138-139 Houndsditch EC3, presently a cleared site, at £485 sqm on a 20 year lease.
Cinderella, you shall go to the ball; not before time some would say given that 40% of Londoners spending is in the retail sector. Finally it appears that the City is recognising the benefit of shopping with the announcement in April of the appointment of Linda Houston as a Retail czar for the Square Mile. She comes at a good time with approximately 140,000 sqm of retail planned in the City over the next four years. Her job is likely to include promoting the City as a retail destination, not only during the week but also at the weekends; this has been achieved by Canary Wharf, so it should not be an impossibility in the City. At present the City is identified in retail terms by a number of discrete locations, including, Paternoster Square, Cheapside, Royal Exchange, Leadenhall Market, and Liverpool Street Station. Perhaps these will now need to be promoted together as part of a wider shopping experience provided by City, time will tell. The main scheme that is planned is presently at the early stages of construction and is One New Change EC4 at the western end of Cheapside. It includes 20,438 sqm of retail on three levels, with four 2,322 sqm units acting as anchors for the development. At present only Topshop have signed a pre let and no details are available of the rent agreed. However, at present levels of value in the locality it is likely to be in the range of £3,000 sqm to £3,500 sqm. Adjoining this is Bow Bells House with 1,825 sqm of retail and across the road is 150 Cheapside EC4 with 2,430 sqm available, both of which do not appear to have any lettings as yet.
A problem that has been identified in the City is that a combination of high Zone A rents and shallow shops means that the rents analysed on an overall floor area basis are very high given that many units will be virtually all in Zone A. Therefore, potential occupiers when comparing units in the City with deeper and/or multi level shops elsewhere in Central London, or more widely with their other properties across the country, may consider them to represent poor value. The design of many of the new shops that are being developed in the City will address this situation. A prime example of this is 1 Old Jewry EC2 where at the close of the year it was announced that the three ground floor units at 1 Old Jewry EC2 had been let to Mosiac Fashions at a total rent of £725,000 pa for 945 sqm. In terms of deals, Inventive Leisure took 1,394 sqm for a wine bar at 140 Leadenhall Street EC3 in February at a rent of £230 sqm. That well known City sandwich bar institution, Fuzzy’s Grub took a unit at 58-59 Houndsditch EC3 in September at a Zone A rent of £900 sqm. In October Rocket took a restaurant unit at 6 Adams Court Lion Plaza EC2 at an overall rent of £205 sqm, whilst in November 18-20 Cullum Street EC3 was let at a Zone A rent of £1,400 sqm. Early in 2008 123/124 Cheapside EC2 was let at a Zone A figure of approximately £3,300 sqm. Up until the end of the 3rd quarter approximately £8.5 billion had been spent on City investments and it was looking like another bumper year even better than the £10 billion in 2007. However, we all know what happened next and investment plunged in the last quarter as money became more expensive, if you could find any. The final total is likely to be less than 2007 but overall still an excellent year although the last quarter has cast a long shadow over the year ahead. Yields stayed fairly static through the first two quarters despite base rate and swap rate increases. However, once the top of the market was called in July and with the subsequent problems with Northern Rock and the credit squeeze, yields have moved out and prime yields are now likely to be in the region of 4.75% to 5% at best. January saw Centurion House 24 Monument Street EC3 sold for £45 million at a yield of 6.5% reflecting only three years to the end of the lease and refurbishment potential. Early February saw the sale of the ‘Gherkin’ 30 St Mary Axe EC3 to a consortium of Evans Randall and IVG Asticus at £630 million and a 4.5% yield. In the northern fringe of the City a 2004 property at 12 Smithfield Street EC1 sold at £56 million, representing a 5% yield on a slightly reversionary rent. March saw one of the largest ever sales in the western fringe of the City when Tishman Speyer sold Peterborough Court 133 Fleet EC4 for £355 million, a yield of slightly under 5% and representing a 25% profit on their purchase in June 2005 at £281 million. April saw a consortium buy the largest single office building in the City at Citypoint Ropemaker Place EC2 for £650 million representing a 4.85% yield for this multi let 2001 refurbishment. May saw British Land selling 175 Bishopsgate EC2 a 1991 building of 35,767 sqm for £406 million, representing a 4.5% yield. Interestingly, this is the first ever sale by British Land at their Broadgate development and signals a significant change in strategy for the company. Vintner’s Place Upper Thames Street EC4 the late 1980’s the 24,600 sqm development overlooking the Thames sold for £175 million in May, representing a yield of 5% on a rent of £9.4 million. June saw Evans Randall sell ABN Amro’s City HQ at 250 Bishopsgate EC2 to the Prudential for £230 million, representing a 3.5% yield on a mid 2005 rent so likely to be reversionary. This represented a 20% profit for Evans Randall having purchased it in 2005 for £184 million. July saw the 1998 development at Governor’s House Laurence Pountney Hill EC4 sold at £120 million showing an equivalent yield of 4.5% and Land Securities acquired 50.5% in 160-162 Queen Victoria Street EC4 for £144.4 million at a yield of 4.6%. As the investment market started to falter a number of deals fell through, although a number of smaller deals did complete. These include 71-77 Queen Victoria Street EC4 sold in September for £7.9 million at an initial yield of 3.66%, the 13,200 sqm Finsbury Dials office scheme at Chiswell Street EC2 also sold in September for £112 million at a 4.5% yield and 33-35 Cornhill EC2, a 1,300 sqm building, sold in October at £9.85 million representing a 4.5% yield at the expiry of a rent free period in November.
As the year came to an end 120 Old Broad Street EC2 with 4,530 sqm sold for £27.5 million representing a 5.3% yield and Condor House 5-14 St Paul’s Churchyard EC4, the 2005 development of 10,220 sqm went under offer at £120 million, a yield of 5.1%. However, the main investment news at the end of the year came from outside the City with the completion of the sale of the Citigroup Tower 25 Canada Square E14 at £1 billion representing a 4.68% yield.
There are certainly a large number of sites in the City that are in the process of site clearance and demolition, but not so many where the buildings are beginning to emerge onto the skyline. This has worried a number of observers given the drop off in lettings seen at the end of the year and the general malaise in the commercial property market. These sites include the proposed Heron Tower Bishopsgate EC2 , The Pinnacle (previously known as Bishopsgate Tower) Bishopsgate EC2, 122 Leadenhall Street EC3 (the Cheese Grater), 20 Fenchurch Street EC3 (the Walkie Talkie), St Botolphs Houndsditch EC3, Walbrook 23-29 Walbrook EC4, 36-41 Gracechurch Street EC3, and 1 Lothbury EC2. These sites total approximately 325,000 sqm and as most of it is speculative it would be optimistic to think that it will all be built out in the current cycle. Those sites where work is more advanced and will come forward in 2008 include 107 and 150 Cheapside EC2, British Land’s developments at 201 Bishopsgate EC2 and the 36 storey Broadgate Tower. In addition, the new build part of Hammerson’s development at the Stock Exchange Building, known as 60 Threadneedle Street will complete towards the end of the year and will bring 19,500 sqm to the market. As an aside, I was interested to see the demolition of 122 Leadenhall Street EC2 where the core was retained and the remainder of the building was demolished from ground level up, giving us the slightly surreal scene of a mushroom in front of a gherkin! 2007 saw the City Corporation squaring up to the Mayor as he tried to extend his ‘call in’ powers to schemes with more than 500 homes, or, more importantly, commercial schemes exceeding 30,000 sqm. After negotiations an important concession was won with his powers to intervene being restricted to schemes exceeding 150m in height and larger than 93,000 sqm. It finally looks like Crossrail will go ahead, the cynics having finally been proved wrong. The City Corporation has agreed to provide a £200 million one off lump sum with a further £150 million to be raised from businesses across London. Other funding is coming from Canary Wharf Group with rumours suggesting an investment of £500 million. This looks like a lot of money but it needs to be remembered that Canary Wharf is presently not able to counter the development boom in the City, as it did in the last cycle. The improved communications with a new Isle of Dogs station are needed to maintain and enhance values on the existing estate of 1.3m sqm and are essential to the success of proposed developments at Wood Wharf and North Quay where a total 825,000 sqm of space is planned. In terms of actual deals, it is not surprising that the early part of the year saw the most activity. There was the sale of the Pinnacle site at Bishopsgate EC2, advertised as providing 88,250 sqm of offices, to Arab Investments Limited at a figure rumoured to be £200 million representing approximately £2,260 sqm of Net internal Area (NIA). In March, 38 Threadneedle Street EC2 sold for refurbishment at approximately £7.2 million equating to £2,600 sqm NIA on proposals for an office and restaurant development of 2,786 sqm NIA and Fleetway House, Farringdon Street EC4 was sold for £50 million for refurbishment and new build to provide 14,440 sqm of offices and 218 sqm of retail, equating to £3,400 sqm NIA. May saw 2 Copthall Avenue EC2 with planning permission for 2,800 sqm sold for £11.3 million representing £4,035 sqm. The latter part of the year seems to have been dominated by the on off sale of the 90,115 sqm Walbrook Square development at Queen Victoria Street EC4. The Spanish property company Metrovacesa had allegedly agreed as far back as September to acquire a 250 year lease in the 1.5 Hectare site for £240m with an initial ground rent of £3 million pa rising to 10% of occupational rents. With the ground rent likely to equate to an additional capital sum of £100 million the deal would represent £3,770 sqm NIA. However, 2008 has seen this deal facing an uncertain future given the current state of the market. Conclusion You would have thought that there was nothing else to write about this year other than the credit crunch etc….. However, there were a number of other important stories that managed to get publicised. 2007 saw the demise of Planning Gain Supplement (PGS). However, the need remains for a method to fund the infrastructure requirements of future developments and a document published by Communities and Local Government in January 2008 sets out details of the replacement for PGS, the Community Infrastructure Levy (CIL). In the City itself, the importance of the retail sector as highlighted above, was given a further fillip in February 2008 with the announcement that the Cheapside Retail Initiative is marketing the area as a world class shopping area to rival the likes of Bluewater by 2012. It plans to almost double the floorspace in the immediate area with 167 new shops. The competition to the City from Canary Wharf, muted of late, is likely to increase as Wood Wharf and North Quay are brought forward. However, the timescale on these developments, given the current market conditions and the importance to them of Crossrail remains somewhat of an unknown. Perhaps it is time for the southern part of the Docklands to the come to the fore. There has been potential for large scale developments at South Quay and the Millennium Quarter for a number of years but little has been built. However, the availability of 50,600 sqm of offices at Ballymore’s proposed scheme at Arrowhead Quay may be leading the way. One of the most interesting stories of the last few years and particularly 2007 has been the growth of rents in the western part of the City. Going back to the early 1980’s, the Midtown name did not exist and areas such as Fetter Lane, Farringdon Street and High Holborn were described only as being in the ‘western fringe’. The rents in 1982 in these areas were approximately half of those in the City core, hard to imagine with the current levels being achieved at New Street Square EC4 and elsewhere in the locality. Clearly there are a number of reasons for this change including the marketing of the area as Midtown, thereby giving it a clearer identity, it’s perception as being less expensive than elsewhere in the City and the West End especially, and in more recent times the immediate availability of large floorplates when these have not been available in more traditional City locations. Although all the above stories are of interest, the global credit crisis continues to make all the headlines and each week seems to throw up a further institution that is either exposed to the US sub prime market and/or is having serious difficulties with its internal finances. All in all I think it is highly likely the commercial property market will be in for a bumpy ride over the next 12 to 18 months.
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