Bringing opportunities

As usually happens, building new transport networks opens up development opportunities. In this case it is the Crossrail with its creation of new stations. Derwent, in collaboration with Crossrail, has put in a planning application for a mixed use scheme of 25,548 sq.metres to be built above the new Tottenham Court Road Station, to be called 1 Oxford Street.

The main part is offices of 16,443 sq.metres on eight floors, complemented by further offices and a new 350 seat theatre.
There will also be retail space. Derwent’s John Burns commented: “The planning application is an important first step in the much needed revitalisation of the eastern end of Oxford Street and is essential for the long term growth of Fitzrovia and Soho, where we have holdings of over 139,350 sq.metres.”

Derwent now has planning permission for a mixed use scheme of 31,214 sq.metres at 80 Charlotte Street, Fitzrovia, W1 plus more residential space at nearby 65 Whitfield Street and Whitfield Place. It will be part new build and part refurbishment to a design by Make Architects on an island site in the middle of Fitzrovia. It will have a capital value of £125 million. Public realm improvements bring the creation of a new park.

Derwent has also linked with Grosvenor for a mixed use scheme at 1-5 Grosvenor Place, next to Hyde Park Corner, that will feature a hotel, commercial and residential space. Just to add to the big list of Derwent projects, it has planning permission for another mixed use scheme of 27,034 sq.metres at the City Road Estate, EC1. This will be mainly offices with some retail and residential accommodation.

How long will the fun last?

The intriguing question in London is how long the inward flow of money into prime assets will continue, although the recent increase from Greece and Spain indicates demand is undiminished.

Apparently there are no limits to what can be sold with the German CLI Group Fund putting he iconic 28,910 sq.m. Lloyds Building on the market for £290 million for a yield of 5.5%.

A similar price is being asked for the 30,110 sq.m Tower 42, another landmark property in the Square Mile.

Knight Frank’s Stephen Clifton said: “Investors with global perspective can find best in class assets and tenant covenants in the city.” Adding to the attraction is that sterling is down 30% since 2007 and there is also the consideration of the euro being under pressure. The high prices available and the prospect of rental increases make this a perfect period for selling, particularly as some of the German funds show large gains.

One of the largest portfolios on offer is from KanAm which is using Knight Frank for the 34,373 sq.m. headquarters of the European Bank for Reconstruction and Development at One Exchange Square, EC2. Also in the portfolio, which could raise £1 billion, are Deutsche Bank’s Winchester House, Thomson Reuters’ 30 South Colonnade and Olswing’s HQ at 90 High Holborn.

Some of the selling is coming from the Irish, such as Shieldpoint, which is putting the 8,361 sq.m. Royal London House at 22-25 Finsbury Square on the market through Savills. This is the third time Shieldpoint has sought to sell city properties in the past two years. What is impressive in London is the wide range of investors. For example, the Canadian group Brookfield is prepared to pay over £300 million for the 42,734 sq.m. Broadgate West, EC2, from Gemini Commercial for a yield of 6%.

In fine fettle

What is clear is that the City office market continues in fine fettle, despite the woes of the national economy, with new developments and a flood of investment deals. The City of London has given planning permission for four new schemes, including greater height for Great Portland Estates’ and Brookfield Office Properties’ 950,000 sq.ft.100 Bishopsgate scheme. A similarly sized scheme is planned by Hines for 100 Cheapside, where Canary Wharf Group was originally the front runner, while Rockspring and Chesterfield Asset

Management have planning for a slightly smaller scheme at Centurion House, EC3. Rockspring’s Richard Bains said: “Since acquiring the project last year, we have drawn up ambitious plans to create an entirely new ground up development which will appeal to a wide range of city occupiers.” The largest development getting planning permission was City Site Estates’ 11 storey scheme of 12,077 sq.metres (130,000 sq.ft.) at 51 Eastcheap, EC3. One scheme that already has planning permission is Hammerson’s £485 million Principal Place, E1 project. Now Hammerson is seeking a partner for the 50 storey residential element of the 73,856 sq.metres (795,000 sq.ft.) development which will have 243 private and 56 affordable units.

Getting the best return

One West End site that will be developed mainly for offices is 8-10 Hanover Street which has been sold by LaSalle Investment Management to Morgan Capital Partners for over £25 million.

The property has planning permission for a mixed use scheme for offices of 2,321 sq.metres (24,984 sq.ft.), together with retailing and six apartments.

“The sale of this asset is the culmination of a process of site acquisition, planning, design and construction development which has resulted in superior returns for our pension fund client,” said LaSalle’s Richard Maple.

Rebuilding Bromley

Bromley has joined nearby Croydon in ambitious plans for town centre regeneration.

The Bromley master plan names 12 opportunity areas for offices, hotels, housing and, in particular, shops, in a £1 billion plan that will need private developer involvement. Among the sites is one west of the High Street that could have 19,974 sq.metres (215,000 sq.ft.) of shopping and 1,180 residential units. Included in the proposals is a major extension of the Glades Shopping Centre.

Two sites have already gone to developers; Land Group will turn the town hall into a 150 bedroom hotel and Cathedral Group will embark on a £300 million scheme in Westmoreland Road.

In the case of Croydon, the master plan for the key site between George Street to the north and the High Street to the west, in the heart of the metropolitan centre, has been up for public consultation in September and October.

The area has some impressive buildings, such as the art deco Gas Board property and also the headquarters of Nestle UK, but it suffers from a poor quality public realm and the legacy of the 1960s St George’s Walk Shopping Precinct.

Bromley based Jeff East of Acorn has already put together a deal for a Travelodge in the town, one of four in the immediate area, the others being in Sidcup, Bexleyheath, and East Grinstead (which will have a Wilkinson store as part of the scheme).

"Generally speaking the lettings we have transacted have been small. The investment activity has been from private buyers, such as the portfolio of 11 freeholds we sold, three of them let to Swintons," East said. He noted that business had become harder in the past two months "but we have had a good year and double that of 2010."

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.

Confident

Taking advantage of the strong market, Moorevale and its funding partner Rockspring has started on the refurbishment of the 4,645 sq.metres (50,000 sq.ft.) 65 Southwark Street. Joint agents are Farebrother and Jones Lang LaSalle. Farebrother is also the letting agent for the 2,787 sq.metres (30,000 sq.ft.) 90 Chancery Lane, WC2 which is due for completion by the end of the year. Farebrother’s Alistair Subba Row said: “Office supply in Midtown has been falling for three quarters and will continue to do so for the rest of the year. Developers and investors should feel confident that new and refurbished space will let well.”

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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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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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Major scheme for Weybridge

One of the largest office developments in Surrey is planned by Rockspring and Exton Estates with a 9,596 sq.metres (103,296 sq.ft.) scheme at the Arrows, Weybridge. The Grade A project named Velocity is on a site which Rockspring UK Value Fund bought from Mercedes for £4.25 million in January. It will have 370 car parking spaces. Rockspring’s Richard Bains commented: “We are confident that, in selected locations, now is the right time to bring newproducts to the market, putting us ahead of anticipated competition.”

Also in Weybridge, Verint Systems has leased a 1,918 sq.metres (20,648 sq.ft.) office from the Merseyside Pension Fund through agent Hurst Warne. There is a long rent free period and the rent is £247.48 a sq.metre (£23 a sq.ft.).

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.

A rosy picture of the market has been painted by DTZ in its predictions for 2011 in a resurgence of pre letting activity and investment. This will be driven by greater demand from occupiers so that DTZ reckons that monthly lettings
could reach 92,900 sq.metres (1 million sq.ft.) with rental increases to £645.60 a sq.metre (£60 a sq.ft.) in the City and £1022.20 a sq.m. (£95 per sq.ft.) in the West End. Colin Wilson of DTZ commented: “As we move into 2011, it seems increasingly likely that further stock will be brought to the market as banks and, in particular, Ireland plc accelerates the de-leveraging process.” Colliers’ view is that the West End retail and hotel businesses are in good shape with rents rising and a weak pound helping to pull in foreign visitors. Even the volume of retail
sales rose in 2010 from the level of the previous year. Colliers’ Mark Charlton said: “Currently an astonishing £1 billion of investment in the West End is
planned over the next two years, with a number of major developments well underway.”

New Cash Flows

If there is one figure that illustrates the fact that the world
is awash with money then it has to be Jones Lang LaSalle’s
estimate that there are 1,000 cash buyers for London property. As a result, JLL’s Damian Corbett believes that the London market will be flooded with international money in 2011 coming from 35 different countries.

These investors arenow prepared to spend £200 million each, a four fold rise in a short period. There has been a shift in the balance of cash flows with this year expected to see more dominance by Far East and German investors. In the case of the Middle East investors, the expectation is for a concentration on putting money into new developments as we have seen in the past few years, notably at the Shard of Glass.

One source of supply of properties will be Ireland’s National Asset Management Agency raising money to pay back bank debt. The British institutions should not be left out of the equation. For example the cash rich Legal & General is prepared to pay £300 million for Delancey and Invista Real Estate’s 110 Fetter Lane for a yield of 4.6%, the lowest in the City for four years. The 24,619 sq.metres (265,000 sq.ft.) property is fully let with the HM Courts Service occupying just over half of theoffices. There is a solid basis for the buying spree because figures from the IPD put the return on property in 2010 at 14.5%, the best for four years.

One of the more unusual deals is that Arab Investments is expected to sell GVA’s 3,855 sq.metres (41,500 sq.ft.) headquarters in Stratton Street, W1 to the Algerian Embassy for £60 million, a yield of under 4.47%. GVA’s lease has another four years to run and the property is expected to be redeveloped. But will it become an embassy for the Algerians? It comes at a time of growing confidence in the West End. Richard Scott of Mellersh & Harding said: “The market is more positive and the shortage of prime offices means we will see increases in rents. The bellwether for the current market is provided by 40 Bruton Street where rents have moved up to more than £1,022 a sq.metre (£95 a sq.ft.) rumoured to be well above that for the top floor.”

French at Kings Cross

Any doubts about the long term future of the Kings Cross
development have been eased with the decision of French bank BNP Paribas to buy a site for its first office development in the UK. The property arm of the bank has plans for a massive 79,968 sq.metres (860,800 sq.ft.) scheme. The bank intends to occupy some of the space and will start construction in 2012. Phillippe Zivkovic of BNP Paribas said: ”Work will begin in the autumn after the Olympic Games and be completed by 2015. The development means that all our six business lines will be established in the UK.”

The widening appeal of Greater London to developers and investors is shown by the variety of schemes outside the centre, notably in East London and the Southbank. At Waterloo investors, together with their architects, have lined up to buy three of the four buildings of the Shell Centre with bids of at least £150 million. The intention is to redevelop the buildings (the central tower remains) and lease them back to Shell in a scheme totalling 111,480 sq.metres (1.2 million sq.ft.).

Alastair Hilton of Farebrother said: “The Shell Centre is a long overdue opportunity for development to make a statement in the area. It is likely to be bought by an institutional player, either UK or backed by an overseas fund.” In Docklands, Asda plans to transform its supermarket site at Crossharbour in a £400 million scheme for 1,000 residential units, a supermarket and other shops and leisure. It has a relationship with Ashbourne Beech dating back to 2005 to develop the 12 acre site. Richard Frank of Town & Beach, parent company of Ashbourne Beech, believes a downturn is a good time to seek planning permission. He said: “We do not want to be in a lengthy planning process when the market returns, as experience tells us that once you are ready
to go, you may have already missed the boat.”