City Commentary
Peter Thomas
Matthews and Goodman LLP
"The average prime yield on property has shown the largest quarter on quarter shift since 1990"...,
"The FTSE has had its worst January since records began"...,
and in the words of Mervyn King, the Governor of the Bank of England, many in the property industry believe that we have indeed entered into a "not so good period".
However this is a case of perception over reality and when it comes to looking for offices today, choice remains thin on the ground.
The occupational property market cannot react as swiftly as sentiment or the capital markets and the reality is, if you are looking for offices today then only one in every 17 buildings are available, despite the plethora of cranes on the sky line. Currently, in the City of London there is only 200,000 sq ft of completed new space on the market with a further 2.9 million sq ft of speculative build available for letting due to be completed in 2008.
On average, take-up of new buildings, which equates to approximately 40% of the total, is approximately 2.1m sq ft per annum. Therefore in theory by the end of 2008, the choice should be greater. However, this will, we anticipate, only push vacancy rates up from 6% currently towards 10% - one in every 10 buildings.
This change is not sufficient to reduce rents, which last year saw growth of 25%, but might ensure a more balanced market.
As headline rents for prime Grade A buildings in the West End have reached £140 per sq ft and in Midtown £80 per sq ft, the City at £65 per sq ft represents good value. No longer is the health of the City office market due entirely to financial and banking sectors. Indeed the largest active requirements are from lawyers including Stephenson Harwood (100,000 sq ft), Pinsent Mason (120,000 sq ft), Dewey & LeBoeufs (120,000 sq ft) and Orrick Herrington (100,000 sq ft). Although the latent demand from Banks remands strong with the likes of Bank of Tokyo Mitsubishi, Merrill and Deutsche all considering their options, and Standard Bank who are searching for 100,000 sq ft this year.
The corporate clamour for larger schemes in the City on an unprecedented scale in the recent past has offered enormous confidence to the market. However, the events of the last few months; the housing market in USA, and Northern Rock here will have dented that confidence for the time being, but with the 2012 Olympics, full employment, a readily available labour supply and low inflation, the prospects for the City Office Market should remain good. Those developers and investors speculatively building offices and retail schemes that are workable and flexible enough for todayís occupiers, should be able to reap the rewards, albeit not with the returns seen over the last few years.
Mixed schemes, such as 1 New Change completing in 2010, part pre let to lawyers K L Gates will no doubt prove highly successful and as it stands schemes delivered in 2008/2009 will be unlikely to be left high and dry. But if the fear of recession creates hesitancy, resulting in a real fall in take up, then confidence will evaporate.