Big numbers for west end residential

Developers’ ambitions to build ultra luxury apartments in the West End are increasing as the flow of foreign buyers continues to grow, the latest being Greek and Spanish investors seeking safe havens for their cash.

Among the luxury projects is a proposed plan by Brockton Capital for a £400 million residential scheme on a corner site at 56 Curzon Street where it has been piecing together the land since 2007.

At the moment, the block has 35 flats and the new scheme would have a restaurant, garden, spa and underground parking. Initial estimates are that selling prices would be £48,420 a sq.metre (£4,500 a sq.ft.).

Another major residential scheme is for the Clarges Estate at 82-84 Piccadilly, a former office of the MI6 spy agency, which is expected to go to Chelsfield Partners for £170 million. The 1 acre scheme could mean similar prices to those
expected for Brockton’s project and comes at a time when there is a shortage of major sites for offices in the West End.

John Caudwell, who made a fortune marketing mobile telephones, has joined in the quest for luxury residential schemes in the heart of Mayfair. He has purchased Audley Square House for £143 million and plans a large residential scheme.

Caudwell said: “The intention is not just to re establish Audley Square as one of the most desirable residential areas in London, but as one of the most desirable in the world, with super prime properties appealing to the most discerning buyers and I believe traditional Mayfair architecture is the key to success.”

Summer high

Far from slowing down, office demand in central London rose strongly again in August with a 13% rise in the City pushing requirements up to 706,040 sq.metres (7.6 million sq.ft.). There was a contrast with the West End, said CBRE, where demand was steady at 445,920 sq.metres (4.8 million sq.ft.). Digby Flower of CBRE said:

“However, a fourth consecutive month that space under offer has remained at or above the ten year average reaffirms our belief that the second half of the year will witness an improved picture on the first six months.”

Further research by CBRE has shown that secondary property has taken over from prime in leading capital growth. Yields on prime central London offices have stabilised but have tightened on secondary property. “Yield compression on prime property looks to have run its course,“ said Peter Damesick, EMEA (Europe, Middle East & Africa) Chief Economist at CBRE.

London commercial property remains the best performing part of the UK with Midtown outpacing the other London areas throughout the summer. Iain Malcolm of Farebrother said “Total investment transactions and occupier take up in Midtown could match, or even exceed, pre recession levels by the end of the year. Demand from a wide variety of business sectors, low supply (6% availability rate) and a modest development pipeline has driven investor interest.”

The most notable recent lettings have been at UK & European’s recently completed 1 Kingsway, where the creators of the iconic Wolseley restaurant will be opening a new 13,500 sq.ft. sister restaurant at the end of this year. Tate & Lyle has taken the top floors (24,780 sq.ft.) for its new corporate headquarters at a headline rent of £67.50 per sq.ft. a benchmark for new space in WC2 in the current cycle and John Laing has just signed up on the 1st & 2nd floors.

One part of Midtown has been transformed with the first stage of the Chancery Lane Enhancement Project completed. It has brought a host of improvements from footpath widening and repaving as well as better street lighting. There has also been tree planting and new seating.

City of London Planning Chief, Peter Rees, said: ”This long term strategy has been carefully coordinated to preserve the unique character of one of the most historic and unusual streets in the City while also making it fit for purpose as part of a 21st century business centre.”

Backing technology

The days when the City was a jealous guardian of its role as the top global financial centre has shifted to a more subtle position.

That earlier hostility was mainly directed at Canary Wharf, which is now a fact of life and has added to the global appeal of London. The new role is to foster the creation of an East London Tech City stretching from a roundabout in Shoreditch to the Olympic site in Stratford. Young entrepreneurs and new start ups are flocking to the area around Silicon Roundabout. Simon McGinn of the City of London said: “The City Corporation has facilitated the start up of an Innovation Centre in Smithfield which provides advice and guidance to SMEs (small and medium enterprises).

In fact, we have already actively supported the SME community for some years through the provision of affordable accommodation in City fringe areas.” He noted that the government was pushing the initiative hard with its vehicle, the Technology Strategy Board, having a £200 million war chest to help the high tech industry. In fact the government has taken its role to promote the Tech City aggressively as witnessed by its support for Eric van der Kleij as UK’s Trade and Industry’s“entrepreneur in residence.”

Also, Intel has thrown its weight behind Tech City, earmarking a supercomputer, capable of handling 2.25 trillion calculations per second, for startup companies in the area to use free of charge. The City of London has sponsored a scheme known as “Angels in the City” to recruit 125 investors prepared to put seed money into new companies. The scheme is in cooperation with the London Business Angels and aims to generate £10 million in new investment annually.

What attracts the young businesses to the area is that costs, notably rent, are relatively low and they are physically close to sources of funding in the Square Mile.

Access to these young companies is one of the reasons why Google and Cisco have moved into the area. McGinn points out that “it is hard to plan a cluster of like minded companies and entrepreneurs but in the case of Shoreditch there was already the framework for high tech operations because the creative industries had already moved in.”

The competition from other parts of Europe, notably Berlin and Dublin, is fierce. The advantage in London is the adjacent pool of wealth through individuals and financial institutions plus the experience of the City of London.

Manufacturing sets the pace

The message from many parts of the region is that manufacturing is leading the way in the improvement in the industrial market.

That is what the government wants to hear, but it has come naturally without the help of the public sector. It is hard to know how far this trend can advance but it is certainly highlighted by DTZ in its research on the UK market with the comment that “manufacturing has been at the heart of much of the positive news during the quarter.” While that applies to the wider UK, other comments from the Thames Valley bear that out.

Tunde Adegbemile of DTZ said: “The Heathrow and West London markets tend to provide a good indicator for Greater London and the south east, and there are some signs of confidence becoming more established with some speculative developments likely to commence in the second half of the year.” Adegbemile added that “from a logistics perspective, demand continues to be dominated by the food retailers, although there are signs of improving activity from the health and pharmaceutical sector.” One of the largest deals for manufacturing capacity is by Albion Land, advised by Jones Lang LaSalle and White Commercial, for Goodrich CTG, a leading carbon fibre technology firm, to take 12,774 sq.m. (137,500 sq.ft.) at Network M40, Banbury.

The £9 million facility will allow Goodrich, part of the US Goodrich Corporation, to expand extensively and develop new products. This follows Albion Land pre letting the slightly smaller nearby property to First Line and forward selling it to a pension fund client of Whitmarsh Holt Young for £8.65 million. Simon Parsons of Albion Land commented: “We identified the site as one of the few locations between London and Birmingham able to accommodate these large units. On the strength of demand we are keen to consider other opportunities along the M40.”

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Asians Buying

The foreign buying of property in London covers commercial and residential and it is significant that Asian buyers were responsible for 60% of the new build deals in the six months to April. They have been active across London, such as in the mixed use scheme at Kings Cross which was extensively marketed in the Far East. This helps to fuel the enthusiasm for new residential schemes, such as at Kings Reach Tower, SE1, where CIT Group and Jadwa Investments have a mixed use project with 173 flats.

Nearby, the refurbished Sea Containers House will become an hotel run by the US group, Morgans. In the City, there is strong opposition to the conversion of office buildings to hotels or residential led by Planning Chief, Peter Rees, who has asked Secretary of State Eric Pickles to exempt the city from planning changes that encourage switching from offices to homes. The City of London receives around 10 enquiries a week on conversion of properties to residential use.

Timing

London & Stamford Property, the REIT which has a shrewd ability to time its moves into the property market to catch the trend, has bought a distribution unit in Harlow for £23 million, a yield of 7.5%. The 25,372 sq.m. distribution warehouse is leased to Tesco and has 12.5 years to run. It is one of the supermarket group’s key distribution points for stores in London and the south east. The acquisition will become part of the joint venture portfolio held with Green Park Investments and means that London & Stamford’s equity commitment is likely to be less than £5 million. London & Stamford has now built its assets up to £1.5 million in a relatively short period. The deal comes at a time when the development of big sheds has slowed considerably, which in the long run should point to an increase in values.

Weathering the storm

There is a depth to the West End office market that helps it to weather the market gyrations between the highs and lows of sentiment. For example, in the second quarter when the shortage of Grade A space grew, bringing a 30% decline in take up, second hand space took up the slack and grew strongly so that the total for the quarter was an average 102,190 sq.metres (1.1 million sq.ft.). Knight Frank reports that the vacancy rate is the lowest for three years at 5.6%.

That has pushed speculative development up by 10% in the second quarter. Richard Scott of Mellersh & Harding commented: “The market has been quiet in August but there is a lot of money chasing safe havens. The hedge funds and commodity traders are still seeking space.

Apart from the shortage of Grade A for letting, there is also the lack of top space for investment.” Among the Mellersh & Harding deals, there is the sale of a mixed use property at 73-77 Kings Road, SW3 to a private client of Concorde Capital for £13.5 million, a yield of 5.25%. While there is always a shortage of large development sites in the West End one that bucks this is the former Middlesex Hospital in Fitzrovia.

The consortium of Exemplar Properties, Aviva Investors and Kauphing has a new design for it with a mixed use scheme of 53,418 sq.metres (575,000 sq.ft.) that uses a mix of facades to merge with the surrounding area, rather than a modernist approach as proposed by MAKE. Part of the office content is designed to appeal to the media as befits the area while the residential space has been changed to 250 small private flats from 181 larger ones.

Shortage looms

Even though the number of new schemes has increased, Midtown and the Southbank are still beset by a shortage of prime office space The result, said a report by EA Shaw, is that rents are increasing and have reached £618.70 a sq.metre (£57.50 a sq.ft.) in the WC2 area. Relief is at hand for supply with a number of large schemes completing before the end of the year, such as 1 Kingsway, Castlewood at 85 New Oxford Street and 11 Strand. EA Shaw’s Charles Killen said: “Market conditions continue to encourage an increase in small and medium sized refurbishments.

With a number of significant schemes due for completion in the latter half of this year and in 2012 across Midtown, Southbank and Soho (but not ready immediately), rents look set to rise in the next few quarters.” The development pipeline in Southbank is dominated by the Shard and The Place but there is a healthy appetite for new schemes in the area, such as Chelsfield and London & Regional’s scheme for 116,125 sq.metres (1.25 million sq.ft.) of mixed use space including residential for the Elizabeth House site adjacent to Waterloo Station.

With the appointment of David Chipperfield as thearchitect, this is likely to be a landmark project. Chelsfield’s Yair Ginor said: “We have taken a daring approach with the new scheme and have told the architect to think about Waterloo Station and to focus on public realm improvements.” Not surprisingly, Midtown is a popular area for investment, one of the latest being the purchase by the Canadian pension fund, Ontario Municipal Employees Retirement System (OMERS) of a 50% share of MidCity Place from Beacon Capital Partners for a rumoured £142 million. It is part of the policy of OMERS to broaden its European investment base. The property will go into its Oxford Properties Real Estate subsidiary. Also on the market is the former Reuters headquarters at 85 Fleet Street which is being offered by Pramerica, the investment arm of Prudential Financial of the US, through Jones Lang LaSalle for close to £80 million.

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Completing the triangle

A major development is on the cards for the site known as the Leadenhall Triangle in the City following the acquisition for £190 million by funds managed by Henderson. At the moment the buildings on the site total 42,734 sq.metres. Henderson has the options of a new development or refurbishing the existing space. Henderson’s Nick Deacon said: “We are confident we will be able to unlock significant value from the site, whether that is wholesale redevelopment or refurbishment.”

Some major schemes are planned for a wide area of the capital, such as Vauxhall, where CLS Holdings is planning a 17,993 sq.metres mixed use scheme of business units, retail space, a hotel and student accommodation.

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Asians buying

The foreign buying of property in London covers commercial and residential and it is significant that Asian buyers were responsible for 60% of the new build deals in the six months to April. They have been active across London, such as in the mixed use scheme at Kings Cross which was extensively marketed in the Far East. This helps to fuel the enthusiasm for new residential schemes, such as at Kings Reach Tower, SE1, where CIT Group and Jadwa Investments have a mixed use project with 173 flats. Nearby, the refurbished Sea Containers House will become an hotel run by the US group, Morgans. In the City, there is strong opposition to the conversion of office buildings to hotels or residential led by Planning Chief, Peter Rees, who as asked Secretary of State Eric Pickles to exempt the city from planning changes that encourage switching from offices to homes. The City of London receives around 10 enquiries a week on conversion of properties to residential use.

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Summer break

After a buoyant recovery comes the adjustment as the UK economy slows and the office market comes up against the shortage of Grade A space. The question at the moment is whether the slowing of the momentum will last for a lengthy period or whether it merely reflects the current market and economic realities, particularly as worldwide confidence has dived. Many of the fundamentals still signal growth, such as the fact that the economy in London is bucking the national trend and growing at a reasonable rate. Also there remains demand for offices in all sub markets. For example, Colliers reports that availability in central London has declined to a 30 year low and Grade A space is down 17%.

Another way of looking at it is that net absorption in the West End in the first quarter of the year was at the fastest rate since 2005. Mike McKeith of Colliers commented: “Competition for Grade A space will remain the key driver of rental uplift during 2011. Absorption appears to have peaked in the city and is close to doing so in the West End. We expect to see increased absorption of good quality second hand space as Grade A becomes scarcer.” Tony Joyce of GVA notes that the “market has been quiet for some months although there are lots of requirements.” Even so, the serviced office market continues to perform strongly with officebroker.com reporting a 20% increase in deals in April-June compared with the same period a year ago.

That can be evaluated against figures from Capita Symonds that take up in the second quarter in central London was below average, with the City down 36% on the same period of 2010 and the West End down 9%. Another shift in the balance of the market is the increased amount of prime residential development which cost consultant EC Harris calculates at £21 billion over the next nine years in a total of 9,000 units.

EMA signs for 25 years

In a period of shorter leases, the European Medicines Agency (EMA) has signed a pre let for 25 years for half the 46,450 sq.metres (500,000 sq.ft.) in Canary Wharf’s 25 Churchill Place, Docklands.

The agency will get a 37 month rent free period but has agreed no break clauses in the lease. This building will complete the original plan for Canary Wharf. In another deal at the nearby One Canada Square, MetLife is moving into the top floor of the skyscraper where it already occupies the 28th floor.

At the moment EMA is housed in 11 Westferry Circus, E14, which the German open ended fund Union Investments wants to sell. The price tag on the 10,591 sq.metres (114,000 sq.ft.) property is around £75 million. It was formerly the headquarters of Readers Digest. Ballymore has chosen the Royal Docks for a major scheme of 232,250 sq.metres (2.5 million sq.ft.) on a 41 acre site at Minoco Wharf.

It would be part of the area’s new Enterprise Zone and would include a new town square and park. On the assumption that the current development phase is coming to an end, the market may shift to a bout of pre letting as companies realise they have to find space for future growth.

Certainly, CB Richard Ellis expects an increase in pre letting as the only option for large occupiers as availability has fallen by 706,040 sq.metres (7.6 million sq.ft.) since 2009. That situation is reinforced by there being only 603,850 sq.metres (6.5 million sq.ft.) under construction in central London, of which nine cater for large occupiers. That makes the timing of Sellar Property’s The Place, a 17 storey scheme of 55,740 sq.metres (600,000 sq.ft.) at London Bridge Quarter to add to the Shard, a good piece of timing. This part of London is being transformed with a new public piazza, railway station concourse, underground, shopping mall and bus station. Irvine Sellar, the developer, said: “The Place will be London’s largest and most efficient office building to hit the market in 2013, at a time when there is expected to be a real shortage of Grade A space available.”

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Rail stations spark deals

Another major scheme adjacent to a railway station is by Solum Regeneration, a joint venture of Network Rail and Kier Property around Walthamstow Central Station. The £20 million project will create a new station square together with a hotel and shops.

There will also be 69 residential units and improved access to the station which serves 2,500 stations throughout the UK. This includes a new pedestrian link towards Queens Road Station. Peter Hughes of Solum commented: ”We are beginning to deliver what are often complex regeneration sites.

This is our second project to secure approval and work is well underway on our first scheme in Epsom. We are advancing plans for a number of other station sites.”

Industrials beat offices

In Watford the market for offices is confined to the smaller sizes, while demand in the industrial sector is more broadly based. That is the experience of Peter Brown of Brasier Freeth. The agency has recently let two 929 sq.metres (10,000 sq.ft.) offices in 41-43 Clarendon Road, the type of deal that is the staple diet of the market.

Brown said: “There is more activity but the supply of Grade A offices is declining. The industrial market is more active and we have recently sold September Properties’ 5,853 sq.metres (63,000 sq.ft.) Eclipse after refurbishment which is now fully let.”

Smooth Ride for the OlympicsApart from the demands of growth in the City, there is also the looming Olympic Games next year which will put pressure on

Apart from the demands of growth in the City, there is also the looming Olympic Games next year which will put pressure on the transport system. This applies particularly to Upper and Lower Thames Streets which will be kept clear for the movement of Olympic dignitaries. The objective of the City of London “is to keep central London ticking over.”

While the major institutions feature so much in the performance of the Square Mile, there is also a need to support small businesses with 85% with City businesses employing less than 50 people. The City is looking to support these businesses through promoting new initiatives such as the Government backed Innovation Warehouse scheme and through introducing guidance packs for SMEs setting up in the City.

Shoppers Flock In

The City of London’s promotion of a broader economic base with increased leisure and retailing has been justified in spectacular fashion in the past year with the opening of the New Change retail complex. This is at the core of the move to a ‘seven days a week’ shopping offer which is gradually widening away from Cheapside to include peripheral areas. New Change, with its 58 shops, (30 of which have never been in the City before), has proved very popular with the 300,000 visitors in December, which despite the poor weather was a figure higher than anticipated. To add to the attractions of hopping, the City of London is seeking powers to allow trading as part of street events, which could prove attractive with the City’s easier parking for cars at the weekend. In time it is hoped that all the retail areas will link, from West (Cheapside) to East (Spitalfields) drawing in the historic Leadenhall Market which is 600 years old this year. The City of London has invested £6 million in the area around New Change to improve the environment, including widening the payments.

Maintaining the pace

All the pieces of the jigsaw are in place for the City to enhance its reputation as the top financial centre with plans for major new developments, the completion of the cluster of skyscrapers and the provision of a considerably broader range of retailing and leisure facilities.

The feedback from the Barbican Residents Association has underpinned Hammerson’s plans for the two building St Alphage House, London Wall which is being designed by MAKE. For Peter Bennett, City Surveyor, this is coming at the right time when there are sizeable requirements in the market which mean pre lets. St Alphage House is one of a number of schemes in a year which promises to be particularly active at a time when city employment is increasing again. Among other schemes in the pipeline are Helical Bar’s 26,012 metres (280,000 sq.ft.) Mitre Square and Exemplar’s 23,225 sq.metres (250,000 sq.ft.) at the London Fruit and Wool Exchange, Spitalfields.

The provision of improved education and leisure facilities is coming through with an international class Guildhall School of Music with a 600 seat concert hall as part of Heron’s residential scheme at the former Milton Court building. The past few months have seen a number of confidence boosting decisions for the Square Mile’s financial standing, such as:

• UBS is to move into a new 74,320 sq.metres (800,000 sq.ft.) complex at Broadgate;
• Bloomberg is to take 46,450 sq.metres (500,000 sq.ft.) in a development of the Bucklesbury Island site and another sizeable chunk will be built speculatively.
• Further funding to complete the Pinnacle skyscraper;

Other schemes at 6 Bevis Marks and 10 Moorgate. The City of London has been particularly supportive of these schemes. The encouraging factor is that there are other large requirements in the market from insurance, legal and banking organisations. Bennett said: “The sentiment is that there is money to be made in the markets and that businesses want to express themselves through new buildings.”

Demand from Banks

One encouraging factor for investors and developers is that demand for office space from financial groups in 2010 exceeded the period before the recession. Knight Frank believes that there will be continued demand from banks over the next three years. The firm’s William Beardmore-Gray said: “There are financial firms we talk to who want to acquire offices and expand in London and need to act ahead of approaching lease expiries in 2014 and 2015.” On the other hand there is some concern among banks that new government regulation may affect their business. But the picture is encouraging for developers and the deals are coming through, such as Axa Real Estate Investment Management (REIM) teaming up with Favermead for speculative development of 19,974 sq.metres (215,000 sq.ft.) at 60 Holborn Viaduct,
the site of the former Bath House. The new building, designed by Kohn Pedersen Fox Associates, will be completed
by 2013. As far as the rest of the Midtown market is concerned, Charles Killen of EA Shaw said: “There has been a bit of a buzz about the market since we came back after Christmas. Buildings that aroused little interest before then now have a
number of interested parties. It is a little volatile but we expect a steady year as the vacancy rate (now 5%) falls further.”

Middlesex Hospital Healthy Recovery

Further evidence of the return of a more confident market is that an agreement has been signed for the speculative development of the former Middlesex Hospital site in the West End. The scheme will include a mix of private and affordable apartments, two Grade A commercial buildings, retail and amenities for local occupiers including a health centre and an education facility. The intention is to submit a new planning application in mid 2011. Following the grant of planning permission, work will commence on site immediately. The agreement is for the Icelandic Bank Kauphing to put in the site at a value of around £150 million and Aviva Investors to provide finance while the scheme is developed by Exemplar. Clive Bush of Exemplar said “Two single lot sizes will be more appropriate for West End occupiers and more acceptable to the investment market. Hopefully we can take advantage of the shortage of stock.”

Selling Irish Stock

The impact of the sale of Irish owned properties is considerable and will continue for some time. A prime site on the corner of Whitcomb Street and Panton Street, Leicester Square, which was formerly owned by Irish Investors, has been sold to a joint venture of an overseas investor, Lemur, and a new development firm set up by former Balllymore director Tim Farrow for £6 million. The intention is to build a 245 bedroom hotel, 33 luxury flats and a 660 seater cinema. At the
nearby Swiss Centre site, Irish developer McAleer & Rushe is hoping to sell the W hotel scheme for £200 million. The decision to sell has come after a number of approaches by buyers for the project. In Pall Mall . Ballymore has sold a site
to Amazon Properties for £6.2 million, a yield of 4 %. At the moment 42-43 Pall Mall is let as offices but Amazon will seek
planning to convert the property to residential use.