At current construction levels, the West End has just two years before it grinds to a halt. In development terms, that is a mere blink of an eye. The availability of grade A space is falling fast. With the amount of building remaining low and planning notoriously difficult, it is hard to see where supply will come from.
Figures by Jones Lang LaSalle show there is 3m sq ft of grade A space available, and around 1m sq ft under construction. Factor in an annual take-up of around 3m sq ft, and the West End has around 24 months of supply.
The situation looks even bleaker when it comes to the supply of buildings with larger floorplates favoured by corporates. According to Cushman & Wakefield Healey & Baker, by the end of last month, not a single building with floorplates in the 20,000-40, 000 sq ft range was under construction. Only one with floorplates in the 40,000-50,000 sq ft bracket was under way – Land Securities’ Cardinal Place East, SW1, which will provide 380,000 sq ft.
In the traditional property feast or famine, this is definitely famine.
Although space is running out, apart from a few large deals in the fringes, rental growth is shaky. Developers and investors have remained cautious. “What everyone predicted is starting to happen,” says Rob Skioldebrand, director in JLL’s West End office. “Those such as Land Securities that took the plunge with Cardinal Place are reaping rewards.”
The Curve, W1, is another example. The Crown Estate and Morley are expected to deliver more than 70,000 sq ft of space in 2006. Construction started in Q4 last year, and yet King Sturge, although remaining quiet about the deal, is already believed to be in advanced negotiations to take the entire space.
Skioldebrand lists Morley, Standard Life and Land Securities among a small group that have been bold, but says many more developers will review schedules and push the development button sooner rather than later.
This is desperately needed. At present, the pipeline looks sparse. Completions in 2006 are expected to provide barely 400,000 sq ft. The year after that, new builds are estimated to total just 240,000 sq ft.
Investors get twitchy
Investors are also twitchy for developers to turn the tap back on. GE Real Estates’ sale of its 44,000 sq ft Golden Square, W1, development in August showed just how far some investors are willing to go. USS bought Benchmark’s scheme for £40m. Once let at an average rent of £52.50 per sq ft, the deal represents a yield of 5.5%, says Julian Stocks, European director at JLL. However, the building has been vacant since completion a year ago. “It is unusual, but a sign of the times. You only do a deal such as that if you are very optimistic,” he says.
Few investors are that brave, but even risk-shy institutions think the time is right. Scottish Widows, Standard Life and Legal & General have returned to development, to name a few. In Paddington, Prudential is funding the former Telstar House and Morley, along with Development Securities, is gearing up to start construction of phase 2 of its Paddington Central scheme. Andrew Peacock, in charge of Morley Fund Management’s central London offices, says the driver here was very different to that of Golden Square. “There is a huge weight of money and pressure to invest,” he says. “But the next phase is about the fundamentals of supply and demand rather than a pure requirement to invest capital.”
Wally Kumar, director at DevSec, says the firm, emboldened by the success of its speculative start of phase 1 of Paddington Central, which let before completion, will push on with phase 2, speculatively developing the next 250,000 sq ft building. “We took a leap then and we are willing to now. Today’s market feels very similar to when we took our previous leap, in that there is pent-up demand and very little supply.”
A further 400,000 sq ft of space for phase 2 will sit on the drawing board for the time being. “We have outline planning permission for the entire lot, but it is a bit of a mouthful on a speculative basis,” says Kumar.
Pointing to the success of phase 1, where Visa took 150,000 sq ft and Prudential signed up for 40,000 sq ft, he says: “These were two big deals, a quarter-of-a-million sq ft just a few miles apart. That’s fairly unusual. But if someone turned up with a 100,000 sq ft requirement, we would probably be tempted to speculatively develop the rest.”
West End agents believe that phase 2 will give Paddington Central the momentum it needs to become a key office location. Although many use accolades such as “the next Broadgate” to describe the area, they are generally looking over a 5-10 year timescale. And, despite 95,000 sq ft of retail and leisure, including lettings to Cannons Health club, Toni & Guy and Japanese restaurant Yakitori, the perception remains that Paddington Central lacks amenities.
Kumar believes this is a marketing problem rather than a physical one: “In a way, I don’t blame people. We stalled a bit, and rested on our laurels after the success of phase one. Because we let pre-completion, none of the agents have really seen it.”
North of Oxford Street set to profit
Across the West End, fortune has favoured the brave. Mark Phillips, partner at Edward Charles & Partners, highlights a two-year-old development pipeline list. He says: “Looking at what was due to become available, it just proves that if you build it in the West End, they will come. There are few prelets, so I think a lot of development will now start on a speculative basis.”
John Burns, MD of Derwent Valley, agrees. “I think the market will move along with speculative building. There is strong demand for big building in the West End at the 100,000-150 000 sq ft size and the risk has reduced considerably. There are not many opportunities to build big space in the West End.”
Whether this heralds a new era of prelets or the more usual West End pre-completion lettings with developers taking the plunge is debatable. But agents agree on one thing – it will mean a push to the fringes.
Guy Taylor, partner at Cushman & Wakefield Healey & Baker, is tipping north of Oxford Street for growth. “Developers can’t get the sites so they will have to go north of Oxford Street and into Paddington.” Occupiers will follow, he believes. “On Euston Road, you can get big buildings, and Wigmore Street is now completely accepted as a location.”
Figures back this up, with Noho showing the biggest growth in the West End. Over the next two years, the pipeline of schemes for the area will swell to a total 45,000 sq ft, nearing levels in Victoria.
Taylor says: “Look at the occupiers. UBS, CBRE, CWHB – all north of Oxford Street.”
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Room for leisure development in the West End remains tight. Despite perceptions that both the licensing and restaurant trade have fallen on tough times, Trevor Shelley at Shelley Sandzer says he has far more enquires than licensed premises. “Premiums remain very buoyant,” he says. “We just sold a unit on West Street, W1, by the Ivy, and we got a premium of £1m. We also did Zilli on Drury Lane, W1 – slightly off pitch – and still got almost £500,000 for that. There is nothing available and everyone is desperately looking.” Part of the problem, says Shelley, is that retail rents have, in some areas, outpaced those for restaurants. “Landlords would now rather let a unit as retail, which means you lose the planning consent. Once that’s lost, it is unlikely to be re-granted.” Shelley is now asking for a balanced approach to be taken by planning authorities. He says: “You can go too far. Look at extremes such as Islington. The local authority granted too many planning consents. You need to look at what is the right balance between retail, restaurants and bars, but at the moment the planners are taking over the market, and it is ridiculous.” |
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1. Paddington Paddington’s pipeline holds 82,000 sq ft this year with 300,000 sq ft promised in 2009. So far in 2005, nothing has been taken up and supply stands at 215,000 sq ft 2. North of Oxford Street Take-up increased to 180,000 sq ft in the first six months of 2005 from 65,000 sq ft, against supply of 560,000 sq ft The pipeline reaches a peak in 2007 at 470,000 sq ft, dropping to 255,000 sq ft by 2009 3. Mayfair Supply stands at 804,000 sq ft, against take-up of 53,000 sq ft, down 67,000 sq ft [since??] The development pipeline reaches a peak in 2006 at 275,000 sq ft. Nothing is planned for 2009 4. Soho 5,600 sq ft of space was taken up in Q2 this year, against 22,000 sq ft last year. With supply of 265,000 sq ft, the development pipeline rises to 74,000 sq ft in 2006. But nothing is in the pipeline between 2007 and 2009 5. St James’s Take-up doubled in the first six months of this year to 58,600 sq ft. Supply stands at 226,000 sq ft No development is in the pipeline until 2007 when 54,000 sq ft will be delivered. By 2009, 167,000 sq ft is planned 6. Victoria 462,000 sq ft of space is in the pipeline this year, falling to 155,000 sq ft by 2008. Take-up in Q2 last year was 76,000 sq ft but this dropped to 11,000 sq ft this year |
