Recession, depression and, in some cases, downright deception.
The market has not been this dire since the Bay City Rollers belted out Bye Bye Baby and prime minister Harold Wilson resigned. All G7 countries are in recession, but which city is best placed to emerge from the gloom?
London is lauded as a finance capital, but will this prove to be its downfall? Will New York, first into the recession, come roaring out ahead of the pack, or will Paris, with its reduced reliance on financial occupiers, pip them both to the post?
Will Hong Kong, buoyed by the vast reserves of Chinese savers, emerge as the dominant player? Or will its huge cash investments in the US, coupled with deflation in the west, hit its manufacturing base and take down its financial market?
Paris
Although Paris comes top in EG’s contest (see below), its victory is perhaps a testament to its failure to capitalise on the boom times compared with London and Frankfurt.
Tight labour laws in France may help soften the scale of redundancies, but they also mean that corporates will have to find other ways to reduce costs and increase productivity. UBS forecasts that growth in France’s GDP will fall 1% this year following growth of nearly 2% pa between 2003 and 2007.
While supply is tight in the centre of Paris, it could easily move into surplus in some suburban areas, just as falling occupier demand is starting to bite. These areas are where banks have relocated their back office functions to reduce costs. For example, Société Générale’s 76,000 sq ft prelet deal in Fontenay-sous-Bois, east of the centre of Paris, was one of largest transactions in Europe in the past six months. But financial occupier requirements in France have shrunk by more than 45% since 2007, so they are unlikely to provide a soft landing to the market.
Cyril Robert, head of research for Knight Frank in Paris, says that the city’s development pipeline will peak next year, but he does not expect an oversupply of grade A space because occupiers are likely to opt for new space over old. “It is worth noting that we are now arriving at break dates on leases that were signed when office take-up peaked in the last property cycle,” he says.
Compared with their British, US and Irish counterparts, French investors do not appear to be under the same pressure to deleverage as loan-to-value ratios are hit.
As Jean-Luc Blanpain, head of research for Jones Lang LaSalle in France, says: “We haven’t noticed that companies are deleveraging. It is probably happening, but we’re not able to quantify it. It remains a risk for the time being, and it is extremely difficult to raise capital, especially in amounts of more than €50m.”
Hong Kong
There must have been a good deal of envy in Davos last month when Chinese premier Wen Jiabao reassured the World Economic Forum that China’s supply of credit was rising and its economy would grow by 8% this year.
But top financiers in Hong Kong must have felt their premier was talking about a different planet, never mind a different country.
“Market confidence is weak, and the market has certainly not found its bottom,” says Xavier Wong, director and head of research for Knight Frank in Hong Kong. He says that property values have dropped 43% since their peak in mid-2008, and are expected to have fallen 60% by the time they hit a trough.
That said, many property players expect growth to begin soon, and at a fast pace. Gavin Morgan, director and head of markets for JLL in Hong Kong, says: “Encouragingly, we’ve seen organisations keen to retain real estate and personnel so they can leverage growth when conditions improve.”
Supply is declining, and only 2m sq ft is set to be delivered this year – 11.9% down on the city’s 10-year average.
Hong Kong banks have put a brake on lending, but this is not seen as an issue because most companies are not highly geared.
London
When is being the best the worst situation you could be in? When you are London – as UBS puts it, the most important financial centre in the world.
The bank predicts that employment growth in the capital will nosedive by 1% by the end of this year – twice as fast as the rest of the Eurozone.
According to Cushman & Wakefield, take-up of space by banks in the City fell by 69% in the 12 months to October, and that includes the boost to the market when JP Morgan signed for 1.9m sq ft space in Docklands, E14, in the fourth quarter.
Vacancy rates in the City are expected to double by the end of the year as new space tumbles out of the pipeline, but this could be the last of it for some time. Neil Prime, director of City agency at JLL, says: “With construction costs still high, the rent required for a developer’s profit of 15% is significantly above the market rent – by as much as £20 per sq ft.”
Much hangs on what the banks do next. Reports abound of banks establishing property holding and development firms for repossessions.
Many think it is time to act. Julian Stocks, director of JLL’s West End investment team, says that the time is now due for banks to act on how they deal with investors and assets with negative equity as refinancing. “Will they take on the assets or sell at distressed prices?” he asks.
Fire sales would cause an even harder and faster shift in values than has already been seen. With values having already dropped by more than one-third, JLL forecasts a further 10-15% drop before a recovery at the end of this year.
A plummeting pound may encourage foreign players – provided that they can swallow having to collect rent denominated in those same beleaguered pounds. And buying property could be seen as a good hedge by those, such as James Roberts, head of central London research at Knight Frank, who predict that inflation could start rising in the medium term.
New York
September 2008, and Barclays Bank takes over Lehman Brothers’ US operation. On Wall Street, the landmark Lehman Brothers’ digital sign is replaced by Barclays’ logo in 20ft-high bright blue neon. But it must have been lonely up there.
JLL says vacancy rates in Manhattan finished 2008 at 10.2%, up from 7.1% in 2007. And Cushman & Wakefield says that office leasing activity has reached a seven-year low as companies with lease breaks opt to stay put and renew.
Employment is down 5%, says Paul Frischer, executive managing director of research and real estate strategies for Knight Frank in New York.
“It’s a shocking number, but it seems the effect of the TARP [the US government’s $700bn Troubled Assets Relief Program bailout of the banks] has maintained a significant amount of the financial market so that it remains in place as the structure is being reworked.”
That last phrase is important. Frischer adds that the reorganisation of Citigroup and Merrill Lynch, and the finalisation of Lehman Brothers’ bankruptcy will all feed into final numbers.
Prices for office space in Manhattan reached a peak of $1,000 per sq ft in the boom years, but it is now trading at $879 per sq ft. Frischer says that it is likely that prices will drop below $700 per sq ft, hitting the bottom of the market in the summer.
Although most of the high loan-to-value deals were based on high cash reserves, rent has started to decline significantly. Fischer says that debt service credit ratios on highly geared deals are looking stretched, spawning a “watchlist” of properties.
Overseas money played a bigger part in 2008 as local investors scampered for cover. However, Nat Rockett, director in JLL’s investment sales team in New York, says foreign buyers have since adopted a “wait and see” approach.
…and the
WOODEN SPOON
goes to…
…and the
RUNNERS-UP are…
and the
WINNER is…
New York
London
Paris
Hong Kong
Score -2
Take-up -22 (12.2m sq ft)
Vacancy rate 34 (8.3%)
Prime yield City 19 (6.75%)West End 15 (5.75)
Prime rent City -16 (£53.50 per sq ft) West End -16 (£92.50 per sq ft)
Best for yields (smallest outward shift in the West End)
Worst for drop in take-up, forecast vacancy rates, and plunging rents
A key financial centre, rocketing rents and values had one way to go
Score 0
Take-up* -21 (24.9m sq ft)
Vacancy rate 35 (11.2%)
Prime yield 32 (7%)
Prime rent -5 (£50.22 per sq ft)
Best for forecast take-up
Worst for vacancy rates
* Take-up figure is net absorption
Score 2
Take-up -14 (25.4m sq ft)
Vacancy rate 60 (5.5%)
Prime yield 40 (5.25%)
Prime rent 0 (£71.35 per sq ft)
Diversified occupier base and tough labour laws mean cutting staff is a headache
Best for lowest drop in take-up, forecast vacancy rate, and rents
Worst for yields – which moved out faster than those of its competitors
Score 1
Take-up* -38 (2.1m sq ft)
Vacancy rate 5 (2.8%)
Prime yield 32 (5%)
Prime rent** -9 (£64.08 per sq ft)
Best for vacancy rates
Worst for, well, nothing
*Total net take-up grade A**Net effective rent
London versus the rest of the world
EG assesses the winners and the losers for the year ahead on the basis of the latest figures, economists’ forecasts and consultants’ predictions, and using seven indicators – total take-up, financial occupiers’ take-up, financial requirements, vacancy rates, forecast vacancy rates, yields and rents.
Figures, to the end of last year, are provided by Knight Frank and Jones Lang LaSalle. They show a percentage change on the previous year to eliminate any discrepancies arising from the differing size of markets. Actual values are shown in brackets.
Scores are based on the difference between the categories in which a city lost and those in which it won. The term winner is used in its loosest sense, as all markets are falling. Equally, any losers had higher to fall from.
London versus the rest of the UK*
London -5
A huge wave of supply is set to wash over London’s markets this year, with around 8m sq ft of speculative space under construction and 4.7m sq ft due to be completed this year. The capital will boast some of the highest vacancy rates in the country and the biggest dips in rents. It does not top the ranks in any category (see figures, p109).
Manchester -1
Take-up 18 (900,000 sq ft)
Vacancy rate -23 (10%)
Prime yield 33 (7%)
Prime rent 0 (£28.50 per sq ft)
Manchester is one of two UK major cities to show growth in take-up last year. Its market is also one of the least dependent on finance sector occupiers, which comprise only 13.9% of tenants – despite these being the biggest acquirers of space in 2008 with, for example, Bank of New York Mellon’s deal at Spinningfields. But its investment market has been badly hit. Jones Lang LaSalle estimates it is down 40% and predicts a further 10% fall.
Birmingham 1
Take-up 48 (1m sq ft)
Vacancy rate -29 (8%)
Prime yield 23 (6.75%)
Prime rent 3 (£33.50 per sq ft)
Last year, Barclays Bank’s prelet of 100,000 sq ft was the largest financial occupier deal in the city for some time. It helped Birmingham score a 48% hike in take-up last year on the previous year. More than one-fifth of that was finance related. Requirements this year from the finance sector are, however, already down 15%, with Barclays pulling its search for 400,000 sq ft. Unusually for a regional city, Birmingham has attracted foreign investors, and two recent office deals involve German fund Oppenheim and Middle Eastern backed EPIC. However, foreign cash has retrenched to the South East.
Leeds 2
Take-up -24 (600,000 sq ft)
Vacancy rate -62 (2.5%)
Prime yield 27 (7%)
Prime rent 4 (£27 per sq ft)
Leeds has positioned itself as the financial capital of the North, and has one of the highest percentages of occupiers from the finance sector outside London. Finance sector requirements in Leeds slowed last year to one-third of 2006’s level. Lloyds’ 40,000 sq ft requirement has been put on ice, along with others from the sector. A wave of space is about to hit the market, and commentators expect heavy discounting ahead.
Glasgow 2
Take-up -57 (900,000 sq ft)
Vacancy rate 22 (7.3%)
Prime yield 27 (7%)
Prime rent 4 (£28.50 per sq ft)
Take-up in Glasgow was down a whopping 57% last year compared to the previous year, earning it the ignoble top spot in this ranking. And a whopping 880,000 sq ft of space will land on the market this year. The city has redeemed itself in terms of value retention, however, although this is around only 5% less than its rivals. Forecasters predict that the city’s market has, at 5%, the least to fall. This is backed up by private equity funds with little property exposure, which are starting to take an interest in investments. Although requirements from the finance sector fell by one-third last year compared with 2007, occupiers from the sector made up one-third of all take-up.
*Figures are to year end and show % year-on-year change. Actual figures are shown in brackets
