Who’s Developing London?
14 Sep 2018
Despite Brexit, the Capital remains a safe bet for investment and development Despite global macroeconomic factors and Brexit, London remains a top place for global investment. The industry has a positive outlook on continued investment in schemes, occupancy in the city’s office space, and a renaissance in the industrial and logistics sector. Physical retail isn’t dead, transport and digital connectively is key to growth, and innovation is required if London is to remain on top.
At the September London breakfast forum, these were the key themes that came out of the discussions between Alan Holland, Business Unit Director at SEGRO, John Burns, Chief Executive Office, Derwent London, Tim Roberts, Head of Offices and Residential, British Land, and Juliemma McLoughlin, Chief planner – Development, Enterprise and Government at GLA. Chaired by Leonie Oliva, Senior Director – Planning at GVA.
Richard Yorke, Director of Analytics at CoStar, opened the morning’s proceedings with a fascinating insight into the state of the London office market:
• 600 million sq. ft. of office space has been completed in 2018, the most for 15 years
• There is a pipeline of 11 billion sq. ft. of office space being built in Central London, more than the peak back in 2008 – 2009
• There are 36 large office buildings being developed in London. Most of the projects are foreign owned.
• Office rents have gone down, driven by the demand of tech firms like Google, Facebook and Amazon, but also because of conversion of buildings into hotels and leisure space
• Leasing activity has slowed consistently since 2015
• WeWork is the second largest occupier in Central London, behind the Government, at 3 million sq ft of space.
• Vacancy rates are creeping up and are likely to spike drastically over the next few years, into double digits.
• There are record levels of investment coming into the city driven by foreign investors. Around £2billion of investment is coming from China. However, American investors are in retreat and have been since the result of the EU referendum.
The future of the London office market
John Burns, Chief Executive, Derwent, said: “The market has surprised all of us since the EU referendum. I don’t think there has ever been a busier time, but there has also never been a harder time to buy. In the locations where we operate, there are probably 12-15 enquiries for space, 100,000 sq. ft. plus, which is encouraging. Occupation is not being driven by senior managers but by talent. In addition to good communication, there’s got to be restaurants, street life and things going on. We think rental growth will be modest but not decreasing. I am optimistic for the future – my glass is half full.”
Tim Roberts at British Land was also optimistic about the state of the market. He said, “I’ve been all around the world, and people still think London is a great place, because its secure. The yields in comparison to the borrowing rates are quite low. London still has a competitive advantage. We are developing less because the market is uncertain but there is a market there. We’ve committed to 1.6 million sq. ft. of development. Even though some of that development will not complete for another 2-3 years, we are more than 60% let or under offer. We’ve carried on and not just battened down the hatches with regards to Brexit.
Traditional office space versus serviced offices
Occupiers want more flexibility in terms of the space they occupy and leases. British Land is providing core leases and flexibility through Storey. Commenting, Roberts said: “It’s all about campuses for us – 80% of our portfolio are in campuses – Broadgate, Regents Place, Herrington Central, and we’re looking to develop Canada Water. Campuses help customers to deal with some of the issues they’re facing – they want flexibility, they want to attract talent, they want to make it easy for their people to get to work. In broad terms there’s about 5% of office stock that is flexible serviced work space, another 5% is short term flexi leases, and 90% is core space. We think the serviced and flex part will expand, but who knows by what.”
Is retail dead?
Retailers are facing head winds and structural challenges, but physical retail will continue to play a role in their omni-channel approach. “Retail won’t become obsolete but there is too much retail in Britain. If you are on these strong transport nodes, like Liverpool street, where the footfall is phenomenal, retailers will make money from having a presence, even if it’s just acting as a showroom,” says Roberts.
A mixture of curation and the ability to introduce different uses, combined with great transport links, that’s the best futureproofing.
Industrial and Logistics focus
Alan Holland at SEGRO, said: “The market place is great in London. Since the EU referendum result we’ve seen more leases written and more occupier confidence. We’re seeing a renaissance of the importance of industrial in its role to service and shape future cities. However, land is scarce.
“The more London grows, the more the city will need an appropriate provision for industrial and logistics space. The draft London plan is helping but we need to do things differently to continue growth. We need to look more at intelligent use of the land and the intelligent lease of that land. Mixed use typology is in its infancy in London, but we need to focus on it. The continent and other parts of the world are doing it well, and so should we.
The Government’s viewpoint
Juliemma McLoughlin, Chief Planner at GLA, said: “We’re looking at trying to really protect CIL, co-location of industrial units and residential, either side by side or vertically stacked. We really want to encourage innovation in design, and make sure locations are a good place to live and effective places for businesses to operate. We’re working on an industrial intensification strategy and we’re really hoping that we get partners who can prove this concept.
“Good growth in London means creating a healthy more efficient and resilient city where communities have access to the homes and economic opportunities they need to thrive. We really want to see London increase its competitiveness, and we want to celebrate what makes London great – its culture and heritage. We’re also working on London being a carbon zero city and promoting healthy streets – getting more people walking and cycling, and less reliant on the car.
London’s transport challenges
The panel made it clear that the Elizabeth Line is going to make a huge difference to the city and the locations along its route. It could give a boost to retail trade, especially Tottenham Court Road and Oxford Street.
However, it also made it clear that as a nation we are in a bit of a transport crisis, especially the rail networks. Central Government needs to do more to invest in infrastructure and transport links.
Infrastructure moves markets, and there is a real opportunity around electric and zero carbon vehicles. There should be greater emphasis on this.