If the West End market over the past year were to be represented by a painting, it would not be Monet’s Water lilies but probably Dali’s The Putrefied Donkey. But could it be time for a new painting? Is there an air of optimistic caution that the dark days are beginning to end, and will developers become creative once more?
The fundamentals of the market are such that there would appear to be room for a glimmer of optimism. Space being released by tenants into the market is decreasing and caution among developers means the supply of schemes is set to be relatively low over the next two years (see table top right).
“The vacancy rate is stabilising and is lower than the average for central London,” says Simon Tann of CB Richard Ellis. Surprisingly, he adds: “I don’t see availability as a problem. Lack of availability is a problem. We need supply to meet demand when it comes back.”
And is demand coming back? Certainly Cushman & Wakefield Healey & Baker thinks there are signs. Head of West End agency Guy Taylor says the number of enquiries for space over 20,000 sq ft has risen significantly during the first six months of this year (see table top left). What is more, he claims some enquiries are beginning to be converted into inspections.
As for rents, Michael Nicholas of Nelson Bakewell says he is hopeful that they will bottom out by the end of the year.
So would it be propitious for developers to get their cranes out? Tann thinks so. “There is an argument that, for those who are brave enough, this is the time to start bringing buildings forward for completion in 2005/2006,” he says.
And Taylor believes that, if demand does come back in 2004, then figures will emerge to support new development. He says there is around 400,000 sq ft of space due to be delivered next year. If take-up returns to the annual average of around 3.25m sq ft, overall supply could drop by well over a third.
He also believes that growing confidence among West End occupiers will help. “I’m convinced that, when the market does pick up, tenants will take back space. I think the market will look quite rosy.”
But every rose has its thorn. Developers could be faced with a market that is reaching the bottom of the cycle, and showing signs of being ready for a steady rise, but there are still the inherent problems, such as financing projects and finding sites. In reality, there is still no evidence of rentals rising, and securing tenants is still not easy. For some developers, the situation is still too risky to gamble on.
Taylor explains: “If you look at development appraisals, the thing that is killing them is the voids, rent frees and construction costs. We’ve got to see that recovery to see the voids come down, and I suspect that it is too soon to speculatively develop.”
Developers say there is also a problem with sourcing funding. “There is no question that it is difficult to debt finance development. Third party banks are a lot more nervous,” says Toby Courtauld, chief executive of Great Portland Estates.
In addition, finding sites is a problem. The West End is traditionally a tight market with few opportunities to develop. Some believe that those holding onto sites are looking longer term, and any sites that do come up for development will be expensive because they will be so scarce.
It is an aspect of the West End market that might protect it from a repeat of the excesses of the 1980s boom, but that fact offers little comfort right now. What does bring comfort is those canny developers that have sites ready and which are not reliant on debt finance. It is these, it seems, that will be leading the way with the developments over the next year (see above).
Agents also believe that some developers could join forces in order to spread the risk. So while the West End is not yet Water lilies, there may be an argument to say that Dali’s The First Days of Spring would be a fitting description of the state of the market.
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Take-up: 936,000 sq ft for the first half of 2003, compared with 2.5m sq ft during the whole of 2002. Total supply: 6.7m sq ft with vacancy unchanged at 6.9% of total stock. Grade A stock represents 3.5% of total vacancy. Prime rents: £62.50-£65 per sq ft there have been no deals in Q2 to demonstrate grade A rents. Headline rents in the core have fallen by around 10% so far in 2003. Source: Jones Lang LaSalle Central London Market Report |
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Time is right Developers’ cranes move into position |
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There could yet be more cranes over the West End skyline. Developers, such as Great Portland Estates and Land Securities, have been doingtheir sums and believe the time could be right. “The West End is pretty much heading for a supply-demand balance by 2005. The question is whether it is a good idea to be developing into that balance?” asks Toby Courtauld, chief executive of Great Portland Estates. The fact that GPE has started on site with a major refurbishment project Metropolis on Tottenham Court Road, W1 which is due to complete in 2005, would seem to answer the question. And if that was not evidence enough, the developer is also negotiating lease expiries at 190 Great Portland Street, W1, with the aim of starting on site in 2005 and completing in 2006. Mike Hussey, development director and head of central London development at Land Securities, also believes that 2005 will be a year of growth. If so, its Cardinal Place scheme in Victoria, which is due to complete mid way through that year, will be timely. “We are seeing green shoots, and the market is certainly looking a lot healthier,” he says. LandSec has also been fortunate in securing a number of sites in the West End for development, a market that Hussey is very enthusiastic about. However, it is with a certain amount of caution that any gung-ho statements are expressed. While neither of these developers is reliant on “nervous” third-party funds, they still have to make the figures stack up. Courtauld, whose company has a capital expenditure of £300m, says: “You have got to make sure that the entry cost is appropriate for the market. With Metropolis, we are assuming long voids and non-aggressive rents. There is a lot of contingency built in.” |
