So, it’s official. Google has signed up for a 1m sq ft prelet at King’s Cross and 2013 gets off to a roaring start in the central London letting market. If lettings were to continue at that rate for the rest of the year… well, that would be a good story. But 2012 was sluggish from beginning to end and, while the economy may be a little less volatile than it was, the indicators are not yet reassuring – not in the UK, nor the eurozone, nor even in China.
So for the third year running, we find ourselves asking the same question in January: is the London letting market poised on the brink of recovery, or must we endure another year of waiting patiently?
Not so for the investment market. If not a record year, 2012 was up there with the strongest on record. £15.4bn was spent on London investment property in 2012 and that, according to Jones Lang LaSalle, has only been exceeded twice since 1989 – in 2006 (£17.25bn) and 2007 (£18.75bn). In 2012, three-quarters of the £15.4bn came from overseas buyers and almost two-thirds of that was spent in the City market. In other words, the City may have suffered adversity in its financial sector but it has certainly not lost its appeal for investors.
The West End
For several years, in fact ever since the credit crunch, the West End has been considered to have a more resilient letting market than the City, thanks to its more diverse occupier base. Rents have been propelled to around £100 per sq ft in the heart of the West End, compared with just £57 per sq ft in the City, by businesses eager to secure premises among the shops, restaurants and cultural attractions of the West End. In 2012 though, there was a tangible, if modest, reversal of fortunes. City take-up in 2012 was up on the previous year, while in the West End it was down on 2011. Moreover, in Q4 the City had its strongest take-up for two years.
The insurance sector has buoyed the City market in 2012. In Q4 alone, Minerva let 281,000 sq ft to JLT in the St Botolph Building; Miller Insurance took an 84,000 sq ft prelet of 70 Mark Lane, and Gallagher Heath committed to 60,100 sq ft in The Walbrook. By the end of the year about half of the space in 20 Fenchurch Street, EC3, and in 122 Leadenhall Street, EC3, was let or under offer to insurance businesses and yet both these towers are still more than a year from completion.
Of course, we are in no doubt that Q1 2013 will be a good one for the West End letting market, since King’s Cross falls within its boundary. But King’s Cross is an edge of centre “mega scheme”, far removed from the core of the West End, where rental values will be more akin to the City core than Mayfair, or even Soho. The question looming over the West End is whether the level of rent reached in the core is sustainable for any but the smallest niche occupiers.
Mat Oakely of Savills believes that value for money will be uppermost in the minds of many tenants for some time to come: “We expect to see better rental growth in some fringe markets than in some of the core locations as tenants look for austerity-friendly deals.”
He is not expecting a huge turnaround in the West End but believes that its rents will be underwritten by lack of supply rather than strength of demand: “West End demand will be better than last year (but still unexciting)… it will be the lack of supply that will bail the landlords out.”
That lack of supply is what Jones Lang LaSalle refers to as the West End’s “own built-in protection mechanism”.
The City
The City meanwhile, as JLL suggests in its latest central London market quarterly, increasingly “looks like very good value”. That raises the prospect of diversification of the City’s occupier base. It already has a strong and growing cluster of tech businesses around Old Street that began organically but now has the added benefit of government policy support.
Just to the west of that, where the Crossrail station is being constructed at Farringdon, lies a cluster of advertising agencies. According to the EGi London Offices database, there are 45 advertising agencies in Clerkenwell today and yet in 1995 there were just 16. In that time, the space they occupy has increased fivefold.
Google has chosen to locate at King’s Cross, a location that is variously claimed as West End, City and Midtown. The geography of London’s office market is shifting continuously and it is hard to keep abreast of submarket boundaries. Google is big enough to make its own place and it is inevitable that smaller businesses will cluster in its wake. No-one who uses the Google search engine would doubt the close association between what Google does and what the advertising industry does. King’s Cross is one stop from Farringdon. Clerkenwell has a growing cluster of advertising agencies but its building stock is generally small. It is not hard to envisage the arrival of one of the big advertising agencies in the City core.
Meanwhile, the financial sector is repairing its tarnished reputation and a cultural change in the City looks likely. Already the lord mayor is talking about the finance industry in a way that would have been hard to imagine a few years ago. Roger Gifford, head of the UK arm of Swedish bank SEB, is the first banker to be lord mayor for eight years. Interviewed by the FT in December, he said that the financial services industry had made “ghastly mistakes” in recent years, but was “reaching towards a newer, healthier capitalism” in which the boundaries of acceptable behaviour, rewards and regulation were being redrawn. He said: “We are in the middle of a grand readjustment – and I’m not sure that’s a bad thing.”
The latest confidence survey conducted by CBI-PwC found that financial sevices companies were feeling more optimisticr about business volumes in 2013 but still expect to make job cuts. It makes sense that restructuring leads to job losses in parts of the business. In 2012, volumes were down in banking and securities trading but up in investment management.
Dan Burn of JLL is cautiously optimistic for the City. “The structural demand is still there – driven by lease expiries and breaks,” he says “and a further round of mergers and acquisitions looks likely, among the mid-tier lawyers and accountants.” He also highlights a number of footloose central London requirements from large advertising agencies looking to consolidate from several buildings into one. “They are focusing on cost savings,” he points out. “And moving from the West End to the City is one way to make them.”
So, can we expect an upturn in lettings in 2013? Probably not, but we could see some interesting shifts in the business geography of London.
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