Development finance With growing costs and a modest lettings market, are towers falling out of vogue with developers? Stacey Meadwell reports
The City market could be likened to a duck swimming across a pond. While on the surface it gracefully speeds along, underneath the water its legs are working hard.
For investment, the appearance is of continued movement, while for lettings, the market is active, but momentum requires more effort.
And it is this scenario that could be partly to blame for the decision by Minerva to withdraw its plans for a 50-storey tower on Houndsditch, EC3, and replace it with something a bit more modest and squat.
The Gherkin, which made the headlines again recently when it was put on the market, is nearly fully let. But none could argue that it has been a swift and easy process.
City of London surveyor Ted Harthill sums it up, saying: “There is an issue with towers, as they are expensive to build and take a long time. They don’t have a good gross-to-net lettable area, and it is difficult to get prelets if the construction period is long.”
A further consideration for developers with towers in the pipeline there are eight in the City is planning gain. London mayor Ken Livingstone could use his planning powers to demand more money from developers. Last week Difa was forced to pay an extra £1m in planning gain for its Helter-skelter tower on Bishopsgate, EC2.
xe “Stumping up extra cash may just push the development costs too far for some.”xe “Stumping up extra cash may just push the development costs too far for some.”Stumping up extra cash may push development costs too far for some.
British Land has avoided this, and is already on site with its Broadgate Tower, EC2. The Heron Tower, EC3, is most likely to be the next to be built, but after that the economics of the market will have to be strong.
A further warning for those planning landmark buildings is the possible rethink by judges of the Stirling architecture prize of the criteria they follow for their awards. This follows the revelation that previous winners were found to be miserable to work in and difficult to maintain.
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Vox pop
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The Gherkin, officially called 30 St Mary Axe, EC3, was put on the market by Swiss Re last month. EG‘s Rich List shows 27 top rollers able to fund the £600m outlay. However, most of these would have to sell all their assets and wipe out their bank balance to stump up the cash. So who does the property industry think will buy the 500,000 sq ft landmark building, and how close will it be to that price-tag?
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“It is looking as if it will be a private rather than institutional investor, purely because of the price, although we saw Tishman join up with Insight Investment to buy Plantation Place, EC3. The Gherkin is such an iconic building, it would appeal to an oil-based investor, and I know some have looked around there. Lancer and Irish investors such as D2 are the obvious names. In terms of price, they are hovering around the £575m-£580m mark, but up there it is a fairly rarefied atmosphere, so they should be able to get a competition going between five and 10 parties.”
James Beckham, King Sturge
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“It’s flattering, but it’s a sign of the times when you have 12 City agents introducing something such as the Gherkin to you before the agent retained on the building rings you up. It’s a fascinating proposal, and we couldn’t discount it, but there would have to be an opportunity to add value. We don’t just want a flagship building.”
Nicholas Gill, ING REIM
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“The pragmatic view will prevail. I suspect that £1,000 per sq ft will be achieved.”
Guy Napier, Knight Frank
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London Q3: take-up and availability
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The amount of space under offer in the City core is the highest for three years
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Availability
Supply in central London has fallen overall. In the southern fringe, this drop is primarily the result of large prelets. The West End has seen a fall in space under construction and new/refurbished space, indicating that good-quality space is being absorbed quickly, leading to a shortage of supply.
Docklands continues to be dominated by premarketing space but, as new or refurbished space continues to be depleted, this could stimulate some speculative development.
A rise in space under construction in the City is indicative of the high number of speculative starts, while the high level of premarketing is the result of six significant schemes brought to the market in as many months.
Take-up
More space has been let in 2006 than in the same period in 2005. In Q3, most submarkets exceeded summer 2005, with the exception of the West End, which had a particularly dismal quarter.
Docklands is having a more successful year than 2005, possibly due to the booming financial economy.
It has been an especially good year for the southern fringe, where take-up this quarter alone is more than double the total space let in the first three quarters of last year.
Calm before a storm?
It was a quiet third quarter for the City core. Prior to the 300,000 sq ft prelet at Riverbank House, Upper Thames Street, EC4, to Man Group, take-up was around 16% below last year’s levels. However, the Man Group deal saw overall take-up rise 9% on 2005 figures.
Only one other prelet at 1 Fenchurch Avenue, EC3, to Kennedys for 65,750 sq ft was signed.
Nevertheless, the outlook for the City core is positive. The amount of space placed under offer in Q3 is one of the highest seen in the past three years, and rents are rising.
Forecasts for financial institutions, one of the key City occupier groups, are good. Expansion is set to continue, and even the threat of rising interest rates is unlikely
to stop the growth of this sector.
The decline of available new or refurbished stock suggests demand for good-quality space remains high, boosting confidence in the market. Developers have responded by pushing the button on more than 1m sq ft of speculative development.
The biggest issue this raises is whether this will flood the market. More than 3.6m sq ft of space is under construction in the City, and work is scheduled to begin on around 4.1m sq ft by the end of 2007 although any tail-off in demand could see developers postponing construction of their schemes.
Notable developments expected to be started in the near future include Allied London’s 380,000 sq ft 200 Aldergate, EC1, and, after much speculation, Minerva’s 440,000 sq ft Walbrook House, EC4, where construction is set for a start in Q1 2007.
In fact, demolition of the existing buildings is already taking place.
The immediate outlook for the City core remains positive. However, developers with schemes scheduled for a start within the next year need to be cautious, as present levels of demand may not be sustained into 2009.
Frances Ketteringham is research analyst at London Office Database. For LOD’s full Q3 report, see next week’s issue of EG
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Source: London Office Database
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Development finance With growing costs and a modest lettings market, are towers falling out of vogue with developers? Stacey Meadwell reports
The City market could be likened to a duck swimming across a pond. While on the surface it gracefully speeds along, underneath the water its legs are working hard.
For investment, the appearance is of continued movement, while for lettings, the market is active, but momentum requires more effort.
And it is this scenario that could be partly to blame for the decision by Minerva to withdraw its plans for a 50-storey tower on Houndsditch, EC3, and replace it with something a bit more modest and squat.
The Gherkin, which made the headlines again recently when it was put on the market, is nearly fully let. But none could argue that it has been a swift and easy process.
City of London surveyor Ted Harthill sums it up, saying: “There is an issue with towers, as they are expensive to build and take a long time. They don’t have a good gross-to-net lettable area, and it is difficult to get prelets if the construction period is long.”
A further consideration for developers with towers in the pipeline there are eight in the City is planning gain. London mayor Ken Livingstone could use his planning powers to demand more money from developers. Last week Difa was forced to pay an extra £1m in planning gain for its Helter-skelter tower on Bishopsgate, EC2.
xe “Stumping up extra cash may just push the development costs too far for some.”xe “Stumping up extra cash may just push the development costs too far for some.”Stumping up extra cash may push development costs too far for some.
British Land has avoided this, and is already on site with its Broadgate Tower, EC2. The Heron Tower, EC3, is most likely to be the next to be built, but after that the economics of the market will have to be strong.
A further warning for those planning landmark buildings is the possible rethink by judges of the Stirling architecture prize of the criteria they follow for their awards. This follows the revelation that previous winners were found to be miserable to work in and difficult to maintain.
Vox pop
The Gherkin, officially called 30 St Mary Axe, EC3, was put on the market by Swiss Re last month. EG’s Rich List shows 27 top rollers able to fund the £600m outlay. However, most of these would have to sell all their assets and wipe out their bank balance to stump up the cash. So who does the property industry think will buy the 500,000 sq ft landmark building, and how close will it be to that price-tag?
“It is looking as if it will be a private rather than institutional investor, purely because of the price, although we saw Tishman join up with Insight Investment to buy Plantation Place, EC3. The Gherkin is such an iconic building, it would appeal to an oil-based investor, and I know some have looked around there. Lancer and Irish investors such as D2 are the obvious names. In terms of price, they are hovering around the £575m-£580m mark, but up there it is a fairly rarefied atmosphere, so they should be able to get a competition going between five and 10 parties.”
James Beckham, King Sturge
“It’s flattering, but it’s a sign of the times when you have 12 City agents introducing something such as the Gherkin to you before the agent retained on the building rings you up. It’s a fascinating proposal, and we couldn’t discount it, but there would have to be an opportunity to add value. We don’t just want a flagship building.”
Nicholas Gill, ING REIM
“The pragmatic view will prevail. I suspect that £1,000 per sq ft will be achieved.”
Guy Napier, Knight Frank
London Q3: take-up and availability
The amount of space under offer in the City core is the highest for three years
Availability
Supply in central London has fallen overall. In the southern fringe, this drop is primarily the result of large prelets. The West End has seen a fall in space under construction and new/refurbished space, indicating that good-quality space is being absorbed quickly, leading to a shortage of supply.
Docklands continues to be dominated by premarketing space but, as new or refurbished space continues to be depleted, this could stimulate some speculative development.
A rise in space under construction in the City is indicative of the high number of speculative starts, while the high level of premarketing is the result of six significant schemes brought to the market in as many months.
Take-up
More space has been let in 2006 than in the same period in 2005. In Q3, most submarkets exceeded summer 2005, with the exception of the West End, which had a particularly dismal quarter.
Docklands is having a more successful year than 2005, possibly due to the booming financial economy.
It has been an especially good year for the southern fringe, where take-up this quarter alone is more than double the total space let in the first three quarters of last year.
Calm before a storm?
It was a quiet third quarter for the City core. Prior to the 300,000 sq ft prelet at Riverbank House, Upper Thames Street, EC4, to Man Group, take-up was around 16% below last year’s levels. However, the Man Group deal saw overall take-up rise 9% on 2005 figures.
Only one other prelet at 1 Fenchurch Avenue, EC3, to Kennedys for 65,750 sq ft was signed.
Nevertheless, the outlook for the City core is positive. The amount of space placed under offer in Q3 is one of the highest seen in the past three years, and rents are rising.
Forecasts for financial institutions, one of the key City occupier groups, are good. Expansion is set to continue, and even the threat of rising interest rates is unlikely
to stop the growth of this sector.
The decline of available new or refurbished stock suggests demand for good-quality space remains high, boosting confidence in the market. Developers have responded by pushing the button on more than 1m sq ft of speculative development.
The biggest issue this raises is whether this will flood the market. More than 3.6m sq ft of space is under construction in the City, and work is scheduled to begin on around 4.1m sq ft by the end of 2007 although any tail-off in demand could see developers postponing construction of their schemes.
Notable developments expected to be started in the near future include Allied London’s 380,000 sq ft 200 Aldergate, EC1, and, after much speculation, Minerva’s 440,000 sq ft Walbrook House, EC4, where construction is set for a start in Q1 2007.
In fact, demolition of the existing buildings is already taking place.
The immediate outlook for the City core remains positive. However, developers with schemes scheduled for a start within the next year need to be cautious, as present levels of demand may not be sustained into 2009.
Frances Ketteringham is research analyst at London Office Database. For LOD’s full Q3 report, see next week’s issue of EG
Source: London Office Database
