In London, agents are pushing out rent-free periods and using other incentives to maintain current headline rents. Can it hold?
Rent-frees that not so long ago were 18 months moved to 20, and are now being pushed out to 24. So what happens next? Well, as one developer said this week: “Once you’ve moved them to two years, you can’t push any further and rents have to start coming down.”
Just as Theresa May has said she wants to avoid forcing business over a post-Brexit cliff edge, developers and agents hope that responding now will avert a similar scenario in the property market. Because against the background of extending incentives, and despite headline moves from the likes of Apple, Google and Facebook, there is no shortage of evidence that occupier demand is easing.
You only need to look at the legal market to find hangovers caused by a cocktail of M&A activity and corporate struggles.
The sale of 10 Queen Street Place, EC4, is on hold as the fate of the embattled European arm of King & Wood Mallesons is decided. With Eversheds exploring a merger with US firm Sutherland Asbill & Brennan, the sale of its offices at 1 Wood Street, EC2, to KanAm could be affected. And now Freshfields has selected 100 Bishopsgate, EC2, for its new HQ, what next for the overlooked Can of Ham, EC3?
Meanwhile, post-merger, Nabarro, CMS UK and Olswang are to take an additional 80,000 sq ft at Hines’ Cannon Place, EC4. But the firms are vacating a total of 207,000 sq ft across two buildings.
All this activity is creating vacant space in offices and impacting on investment. There are challenges ahead.
■ With the currency discount and Donald Trump’s inflammatory tweets, there are plenty of reasons to suppose that the UK’s appeal to Chinese investors will endure post-Brexit. However, mooted changes in China could act as a brake.
Beijing is considering blocking state-owned enterprises from investing more than $1bn in a single overseas real estate transaction. Officials may also require permission for overseas funds transfers of $5m, rather than the current limit of $50m.
It is likely that, if implemented, the new regime will slow outbound investments by Chinese businesses. Given that the more substantial the sum, the greater the scrutiny likely to be applied, expect mega outbound investments over $10bn to be most affected.
The change is driven by the Chinese government’s need to manage depleted foreign exchange reserves. However, it can’t afford a hard stop: SOEs need to diversify risk by investing overseas. Thankfully, the Northern Powerhouse continues to appeal.
Where the effect might be more keenly felt is among private investors. A $5m approval limit may deter individuals from buying overseas property, which would be another blow to the already bruised prime central London market.
■ At Estates Gazette’s London Question Time this week, deputy mayor for London James Murray said one of his highlights of 2016 was that recognition of the housing crisis was now universal and a focus on solving it widespread.
Both his diagnosis and applause are well judged.
Equally encouragingly, momentum in finding solutions continues. This week Legal & General Investment Management Real Assets raised £170m from major institutions, taking the investor’s total investment capability for build to rent to around £1bn. It has already secured more than 1,000 homes under construction or in planning in Bristol, Salford and Walthamstow, and has a pipeline of future projects, including in Birmingham and Leeds.
Meanwhile, mergers in the housing association sector continue. Peabody and Family Mosaic followed in the footsteps of L&Q, which combined with East Thames Housing Association last week. Peabody, as it will now be known, will provide 55,000 homes to 111,000 residents across London and the South East.
Both deals should drive delivery. L&Q this week secured a £2.6bn refinancing, allowing it to fund massive expansion plans. Chief executive David Montague said it intends to use this clout to create 100,000 homes over the next 10 years – from London to Manchester. Half will be affordable, half for private rent and sale.
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