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.”

Beating the forecasts

Few analysts could have predicted the rapid turnaround in the central London office market when the recession kicked in
during early 2008. The forecasts were terrible; the collapse of the market, the decline in employment and the loss of the City’s status as the leading world financial centre. They were wrong and now the problem, particularly in the Square Mile, is the shortage of supply as financial institutions expand and increase their employment.

The problem is that there is a shortage and those with the prime space, such as Gerald Heron in Bishopsgate and Irvine Sellar at the Shard, London Bridge have reaped the benefit. Some property professionals are concerned about the period of shortage of supply whic could last two years, suggests Tony Joyce of GVA. Here, one of the problems noted by Joyce “are landlords whose funding package pushes them towards seeking 15 year leases at a time when occupiers mostly want 10 years”.

For City agents like Joyce the recovery in rents has been rapid with a majority of deals done for prime new space being above £538 a sq.metre (£50 a sq.ft.). In fact, the City saw the largest annual increase in rents for 22 years in 2010 with increases of 25% for prime space, said Drivers Jonas Deloitte. That was on the back of a letting total of near 557,400 sq.metres (6 million sq.ft.). Drivers Jonas Deloitte’s Anthony Duggan commented: “Although we are not expecting rents to continue at the pace seen last year, we do expect double digit growth again in the City.”

The firm makes the point that only two large buildings are completing this year. Naturally enough rent free periods have come back substantially, in both the City and West End. Investors, dominated by foreign nationals and organisations, have responded to the strong performance with purchases in central London in 2010 totalling £9.9 billion, a rise of a third on the previous year. Overseas buyers accounted for two thirds of the total. Cushman & Wakefield’s Clive Bull said: “With sterling still weak and an increase in stock likely with banks offloading assets, we are confident that 2011 will see volumes continue to rise.”