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An array of developments, both recently-completed and planned, is breathing new life into Victoria’s property market. But some players are worried about oversupply. Adam Coffer reports What special quality makes Victoria – this grey and imposing southern tranche of the West End – so peerless? Put simply, things are happening there. Last week, West End agents breathed a collective sigh of relief and almost reached for the champagne bottles simply because activity had begun to increase slightly (News, 14 September, p42). But those charged with leasing office space in SW1 have been happily keeping the fees ticking over all year. In the past two quarters, including what was widely accepted as the quietest summer the West End has endured this property cycle, Victoria saw a remarkable 250,000 sq ft of offices taken up and at least a further 200,000 sq ft agreed (see table p121). And there is more to come from the development side anyway. Over the next three years some 4m sq ft of development is planned for an area covering less than five square miles (see p121). Some of the biggest players in the UK and US want a piece of the action. But it has led many commentators to fear an oversupply will hit the market in 2004. A large slice of Victoria is under one landlord, Land Securities, whose Stag Place scheme is the largest development set to take place. Robert Heskett, head of LandSec’s London portfolio management, is not getting carried away. “While there is a reasonable supply of good and variable quality space on the market, the real factor at present is lack of tenant demand,” he says. “We are fortunate that we do not have a significant exposure to voids, but we would like to see more activity to maintain rent levels and a continuing turnover of space to create choice for businesses who might want to locate in Victoria.” There is a reckless hypothetical doing the rounds of West End agents and developers that might cause concern for bullish Victoria players. The scenario is centred on Victoria’s and Westminster’s draw for government-related occupiers. David Hallett, head of West End agency at King Sturge, which is understood to represent a handful of government occupiers itself, explains: “Imagine if the government decided to up sticks and leave Victoria. It is not such a laughable concept. The biggest threats to Victoria are Waterloo and Vauxhall. “They are also cheaper than Victoria. If you can get the government occupiers to overcome that mental barrier of going south of the river, they could flee.” Government departments LandSec’s giant St Christopher House redevelopment on Bankside, SE1, and Frogmore’s One Westminster Bridge, SE1,are both expected to lure government tenants. However, Guy Taylor, head of West End agency at Cushman & Wakefield Healey & Baker, argues: “The civil estate will remain north of the river. St Christopher and Frogmore’s schemes might pull the odd government occupier but it will be opportunity-driven rather than a dramatic shift from Victoria.” But even a slight departure by the government could lead to massive oversupply in Victoria. According to ATIS Real Weatheralls, 47% of public sector organisations in London are located in Victoria/Whitehall, 17% are in Midtown and 6% in the City. The balance in London (30%) includes clusters in Croydon and Hammersmith. But there is evidence of a willingness to leave SW1. “Quangos – operating at arm’s length from ministers and influenced by factors such as staff retention and image – will consider alternatives to Whitehall,” says Richard Craggs, head of London Research at ATIS Real Weatheralls. He cites the Competition Commission taking Victoria House in Midtown, and the BBC, which took an assignment at85 Tottenham Court Road, W1, as examples. However, during the same period the Lord Chancellors Department acquired 100,000 sq ft at Clive House, 70 Petty France, SW1, and 90,000 sq ft was taken by DEFRA at3 Whitehall Place, SW1. Sarah Bate, Knight Frank’s head of central London research, explains the attraction of Victoria to government occupiers is not simply its proximity to Westminster. “It’s a necessity for government departments to be in close proximity to each other. Moreover, Victoria is a central location and yet still at a rental discount to Mayfair and St James’s.” Grosvenor claims there is a true diversity of occupiers looking for space in the area. The Duke of Westminster’s property company was badly stung by the Enron debacle. Jointly with Clerical Medical, it owns the 215,000 sq ft (19,970m2)40 Grosvenor Place, SW1, which was Enron’s UK head office. It is also developing, in a joint venture with JE Roberts, the 250,000 sq ft (23,220m2) Belgrave House, opposite Victoria Station (see table). Grosvenor’s commercial director Jeremy Titchen says: “There is more than just the government in Victoria. We let 100,000 sq ft of 40 Grosvenor Place to an investment management firm [Capital International] and viewings have come from both corporate and governmental organisations.” Tony Parrack of Edward Charles & Partners, joint agents with Strutt & Parker on Morley’s 40,000 sq ft (3,700m2)4 Matthew Parker Street, concurs: “Initial interest came from local occupiers and government-related organisations. But most recently it has come from unrelated organisations outside SW1.” BT, Arcadia, Reed Elsevier, Barclays Capital, Total Fina Elf, CapCo and BP are among the bigger occupiers known to have potential or active requirements for the area. Nonetheless, corporate requirements are overshadowed massively by governmental requirements. There are believed to be at least 15 government-related occupiers either actively or potentially requiring space in the West End. Healthier position Among these are the Legal Services Commission, which is looking for 80,000 sq ft, and DTI, with a requirement of potentially up to 500,000 sq ft. Archie Cowan, head of West End agency at Knight Frank, says: “They will not all flee Victoria. There is hardly anything else being developed on the same scale or anywhere else you can get that type of scale. If you have a large West End requirement there are quite simply only two places you can go: Paddington or Victoria.” Cowan adds: “Victoria is undoubtedly in a healthier position than any other West End sub-market.” CB Hillier Parker’s figures show that availability in Victoria is just 740,624 sq ft (68,804m2), which is a 10% reduction on the end Q2 2002 figure. This gives a 3.6% availability rate in Victoria compared with 7.2% across the West End. However, BSL employment data shows that public administration and defence (which is a reasonable proxy for government occupiers) makes up 25% of Victoria’s employment total. Simon Tann, director of CB Hillier Parker’s central London team, says: “This does make it susceptible to possible relocation decisions by government departments, and BSL’s forecasts do include a slight reduction in employment in this sector over the next five years. “But in the West End, there is demand for large units by a number of sectors. This might counteract any reduction in government occupation.” Adam Hetherington, head of West End agency at FPDSavills, which is joint letting agent with C&WH&B on the first major scheme due for completion in the area – HRO’s Victoria Plaza – says: “The government remains a captive source of potential demand in Victoria, particularly given increase in public spending. But Victoria continues to attract a wide tenant profile.” Rather than flee the area, Grosvenor’s Titchen is more concerned that spending watchdog, the National Audit Office, will force government occupiers to look for cheaper space in Victoria. The NAO has appointed King Sturge to examine whether its own 150,000 sq ft (13,950m2) HQ at 157-197 Buckingham Palace Road, SW1, is value for money. The NAO has been fiercely critical of other government departments for not making the most of their property assets. Top Victoria rents have hit the mid £50 per sq ft mark, and Titchen says: “If the NAO moves it will show the way. It is the policeman of all government occupiers and what they do will be under scrutiny.” Development Station’s revamp is key to success Victoria has one of the biggest supply pipelines in the West End, with a level of development activity not seen since the 1960s. Over the next four years,17 developments of more than 30,000 sq ft are set for construction, all close to the station. The three major schemes perceived to be the catalyst for development are: CGI/HRO’s Victoria Plaza; Grosvenor/JER’s redevelopment of the 250,000 sq ft (23,220m2) Belgrave House; and Land Securities’5-acre site to the north side of Victoria Street, known as Stag Place. These will ultimately include more than 500,000 sq ft of offices and 130,000 sq ft of retail, scheduled for completion in 2005. LandSec’s Robert Heskett says: “The successful development of Victoria Station as a modern transport interchange is a key element in confirming Victoria as a preferred business location within central London. “The true potential of the area will only be fulfilled if the station is developed to provide an entry point to Victoria that is truly welcoming and a really positive advertisement for the area, as well as dealing with all its transport needs.” “Victoria is Victoria Station,” adds Grosvenor’s Jeremy Titchen. Demolition work has begun on Grosvenor’s and JER’s redevelopment of Belgrave House, and Titchen says “We are not blindly confident but we are positive about the area. If we weren’t we would stop and wait.” Grosvenor has been keen to push forward with its own scheme and encourage other developers to step up their plans for the area. Last year it formed an alliance with LandSec, HRO and Railtrack to attract retailers and office occupiers to Victoria. Stow Securities, which plans to redevelop Davis House in Wilton Road, is close to joining the alliance. The first scheme to complete will be HRO’s and German fund CGI’s Victoria Plaza above the station itself. The five-floor building will be the only big scheme available in the next 18 months. It is therefore no surprise that financial services occupiers are being tipped as the most likely tenants. C&WH&B’s Guy Taylor says: “The big selling point of Victoria Plaza is that we are a year ahead of the rest and are the only game in town.” West End stock (m sq ft) Take-up has been relatively high in Victoria 2002 Core 19.09 North 26.51 South (Victoria) 22.07 West 6.16 Strand 11.05 Bloomsbury 3.52 Total 88.40 Source: Knight Frank SW1 pipeline Victoria has seen a rash of significant deals over the past few months Name New/Refurb Status Sq ft Available Developer Central House, Matthew Parker Street Refurb U/C 40,000 2002/Q4 CGNU/Hill Street Properties 20 King Street Refurb U/C 22,500 2003/Q2 SLC Langbourn 3-8 Whitehall Place Refurb PPG 85,000 2003/Q3 Crown with Kier/PFI MAFF. Cluttons Victoria Plaza (Phase 1), Buckingham Palace Road Refurb PPG 257,000 2003/Q4 Commerz Grundbestez/HRO 6 Haymarket Re-dev PPG 36,000 2003 The Crown Estate Treasury Building, Great George Street Refurb U/C 350,000 2004/Q2 Exchequer Partnership/ Chelsfield, Bovis,Stanhope (PFI) Belgrave House, Buckingham Palace Rd Refurb U/C 274,000 2004/Q3 Grosvenor/JER Davis House, Wilton Road Refurb PPG 52,000 2004 Stow Securities Marsham Towers, Marsham Street U/C 520,000 2004 Home Office – Euroland/Bouygnes Wilton Plaza, Wilton Road New App 103,000 2004 Point Ventures Rochester Row Police Station, Vincent Square Refurb PPG 33,000 2004 Barratt Homes Home Office Building, Queen Anne’s Gate Refurb App 270,000 2004 LandSec/Government (PFI) Broadway House, Broadway Site 87,000 2004 Capital & Counties Greycoat House, Greycoat Place Site 93,000 2004 Derwent Valley Holdings Stag Place, Victoria Street New PPG 565,000 2005/Q2 LandSec Terminal House, Grosvenor Gardens New Site 80,000 2005/Q2 Grosvenor Romney House, Marsham Street Refurb PPG 167,000 2005/Q3 Motcombe Estate (potential extra 200,000 sq ft) Post Office site, Howick Place New Site 75,000 2005/Q3 Consignia & Partner Elliot House, Allington Street Redev PPG 140,000 2006/Q1 LandSec Source: Knight Frank West End south development – August 2002 (sq ft) Victoria has one of the biggest supply pipelines in the West End, with a level of activity not seen since the 1960s Under construction In pipeline Pipeline-awaiting Tenant release Total Prelet Spec Prelet Spec Prelet 2002 0 40,000 0 0 0 163,000 203,000 2003 0 279,000 85,000 36,000 0 0 400,500 2004 1,120,000 274,000 270,000 292,000 182,000 209,000 2,347,000 2005 0 0 0 322,000 500,000 0 822,000 2006 0 0 0 0 0 0 0 1,120,000 593,500 355,000 650,000 682,000 372,000 3,772,500 Source: Knight Frank