The West End is the most expensive office market in the world, says Cushman & Wakefield. It achieves headline-breaking rents andeye-watering investment yields, but even the Savile Row suits are losing their sharpness post market peak.
Staffing levels are being reassessed, costs scrutinised and lunch venues reconsidered. Fees are being monitored, portfolios revalued and deals taking longer to complete.
Despite the comfort of a tight office supply pipeline, there are few who will admit to not having concerns about the economy and market performance over the next 12 months. So how are the West End agents and developers preparing to weather the storm?
EG spoke to five West End players about their concerns and strategies.
Developers
Toby Courtauld, chief executive, Great Portland Estates
The Cavendish Square-based developer has endured its fair share of bad headlines in recent months, having seen a 16.2% drop in NAV between June 2007 and June 2008, and reported its first pretax loss since 2003.
None the less, chief executive Toby Courtauld is confident that the company is in a strong position. He admits that deals are harder to do, and believes that the £100 per sq ft-plus end of the market is most at risk.
“We have one suite let at more than £100 per sq ft, so don’t have any exposure to that market,” he says.
GPE has spent the past 12 months “cutting its exposure” in preparation for tougher trading conditions, and consequently now has one speculative building under construction, the 100,000 sq ft Wells & Moore building in Mortimer Street, W1, which is due for completion in December.
“We have a further £15m to spend on existing schemes,” says Courtauld, adding that Wells & Moore will be launched next year.
“The time is coming when we will be able to get into the market at a much lower level,” he says. “The exit strategy is more difficult, but the front end is going to get much easier because we are beginning to see people wanting to sell.”
Courtauld says the company has been reducing its gearing, and has a low loan-to-value ratio of 30%, which “gives us a huge amount of firepower”. Indeed, in July, Courtauld said the company had £300m earmarked for distressed sales.
GPE’s “time to buy” may well be coming. In the meantime, GPE has a portfolio of 2.5m-3m sq ft of what Courtauld calls “reposition opportunities”, which could keep it busy for up to 10 years.
It has always been the developer’s strategy to buy buildings with a low rental income, and redevelop or refurbish to push up rents.
But you need occupiers to do that and, in the interim, there are shareholders to keep happy. “The equity market has a desire forshort-term results,” he says.
“We value our property quarterly and give shareholders every opportunity to quiz us. But we must be taking medium- and longer-term decisions, and that isn’t going to change.”
John Burns Derwent London
Like Great Portland Estates, Derwent London has seen a drop in NAV – 9% in its first half. Its portfolio is aimed at the middle rather than the high end of the occupier market.
Arguably, its exposure is less than GPE’s, with only 15,000 sq ft of speculative space in the pipeline, at Gresse Street, W1. The developer secured planning permission in the summer but will not begin to develop the scheme until 2009. The remainder of its developments have the security of prelets.
John Burns, chief executive of Derwent London, says: “We are doing our deals and haven’t seen rents falling back in our sector. They are taking longer, and rent-frees have gone up by 15-20%, but it isn’t the end of the world.”
Indeed, of two deals that were completed last month, one saw Geronimo Communications taking 12,150 sq ft at Qube in Fitzrovia at a healthy rent of £58 per sq ft and six months rent free.
None the less, developers cannot afford to stand still for too long. Burns is cautious about the future.
“We are in a good position financially, having low gearing, but we buy off market and there is very little to acquire,” he says.
Adding that the company may “selectively” sell this year but sold £350m worth of property last year when the market was stronger, he envisages sales topping only £50m this year.
“We’ve got a lot of opportunities in our existing portfolio, but we are slowing things down a bit, and maybe we won’t do one or two smaller schemes outside the West End,” says Burns.
In the meantime, the wider economy is his biggest concern. Deals will inevitably be postponed, says Burns, and finance is an issue for the market until it is “available to a much wider audience”.
He adds: “2009 is going to be very tough, but there should be signs of improvement at the end of that year.”
Agents
Paul Smith, DTZ
A lack of biscuits in meetings is the least of DTZ’s worries. The international firm, with a 17-strong West End team headed by Paul Smith, has seen profits dive by 87%. This has resulted in redundancies and, earlier this month, the announcement of a further £15m of cuts.
Against this backdrop, Smith could be forgiven being a bit glum, but he is far from it. “If you aren’t enthusiastic, you might as well give up,” he says.
It is in an agent’s genes to point out the positives, and he lists these as limited new office stock and pipeline in the West End market. However, he admits that demand has slowed, and tenants are pushing for better deals.
“Yes, we have got less activity, but rents haven’t really dropped except perhaps on marginal buildings,” he says. “Rent-free periods have probably moved out to one month per year, but we are still getting £100 per sq ft deals.”
Smith is under pressure as an agent on the West End’s trophy development of the year – Fortress House in Savile Row (see p97). The market is watching deals at the building for an indication of how the top end of the market is holding up.
He admits that fees will drop if rents do come down, but believes that clients will pay more in tougher times to “incentivise” performance.
“We will have to work harder at marketing buildings,” says Smith. “It’s more about doing traditional marketing and marketing things better, about selling and selling it harder.”
Whereas some set there stall by having experience in tougher times, Smith believes the benefits of having a younger team is that it brings an enthusiasm possibly not seen in those on their second or third market cycle.
Paul Gold and Jonathan Martyr, DE&J Levy
Some may believe that there is safety in numbers, or that bigger is better in tougher times, but they do not include directors Paul Gold and Jonathan Martyr of niche West End practice DE&J Levy.
The 43-strong firm has endured criticism in the past for not expanding. While graduate training programmes are being slashed at national firms – recent reports put intake numbers down by up to 80% – at DE&J Levy, it is a vital part of the business strategy.
Gold explains: “We are hiring and have made commitments. We see graduates as the lifeblood of the firm. By the time we’ve trained them, the market should have recovered, and they will be ready to go.”
He points out that the last recession led to a skills shortage in the industry, so his strategy could be a canny move.
But, in order for the business to test the theory, it needs to navigate through tough market conditions. Martyr says that overheads have been scrutinised. “We’ve looked at every outgoing cost, reviewing contracts and general running costs,” he says.
Luckily for those in long meetings, biscuits survived the cuts, but lunches are more frugal.
Martyr explains: “We encourage people to get out and see agents every day. The difference is that rather than going to Quaglino’s they go for a sandwich.”
Gold adds: “You still have to meet people and wine and dine. But you’ve got to wine and dine the right people and consider where you go.”
He believes that being a small firm is an advantage because the team can move easily to adapt. For example, during the last recession, the firm set up a team to deal with mortgage defaults.
Like most other agents, he believes that the West End is in a strong position to survive without too many changes. “Rents will fall, supply is limited, but end users pose the threat. There are six to nine months to run before we find a new level,” he says.
In the meantime, clients will put pressure on fees, and the firm will be doing its best to win instructions and then, crucially, carry them out successfully.
Tony Parrack, Edward Charles& Partners
Tony Parrack of Edward Charles & Partners is on his third market cycle, and has learnt from experience what gets a firm through the tough times.
The agent is a tiddler, having just 12 staff including five equity partners – a fact that some might feel makes it more vulnerable than most.
But, like DE&J Levy, Parrack believes there are advantages to being small. “Smaller firms have lower overheads and greater flexibility. We have never done big-ticket corporate entertaining, and don’t have company cars, so we don’t have those sorts of overheads to cut,” he says.
“You also don’t have to worry if you are stepping into someone else’s patch. We don’t have a City office, for example, and there is much less bureaucracy.”
Profits are being squeezed. “We try and put money away during the good years,” says Parrack. “But, in the bad years, you don’t take the bacon home.”
He says the key is having more contact with clients as they need reassurance. “If you are marketing something, then you need to try different ways of getting the same message out, not just putting a bigger, flashier brochure on the desk. When you’ve called someone once a month, and they haven’t come to see your building, you have to find other ways.”
It takes discipline and persistence, he says – being a nuisance but in a “nice way”.
“There is more focus on getting the job done, and it isn’t going to get done with good luck and a following wind,” says Parrack. “Luck doesn’t come into it.”
As to the threat of bigger firms “nicking clients”, it would be easy to let bitterness and cynicism creep in, but Parrack has an innate enthusiasm that gives him an attitude that is more in tune with “bring it on”.
