by Jonathan Harris
To the casual observer, it may appear that little has changed in Soho over the past seven years. The area has managed to retain its engaging mixture of crowded streets, leafy squares, varied retail outlets and a rich diversity of restaurants, pubs and clubs, happily juxtaposed with traditional and newly developed office accommodation. It is the antithesis of the soulless, deserted city centre dominated by empty office blocks after the commuting workers have left for the evening.
Not surprisingly, Soho’s lively village atmosphere continues to draw the more image-conscious service professions, notably the advertising, film and television companies who are still the dominant occupiers. Their presence has in turn attracted subsidiary and post-production companies, reinforcing the area’s “media land” reputation.
While the tenant mix and outward appearance of Soho has remained relatively constant there has, however, been a marked change in the investment market’s perception of the area. This has been prompted by the dramatic rise in total occupational costs since 1987. The main part of this increase took place between 1987 and 1988 when it rose 81% to £39.61 per sq ft.
Although this levelled off in 1988-89 in line with the market elsewhere in the West End, Soho still recorded a 3% increase to an average of £40.80 per sq ft. A good indication of the current level of the market is provided by St Georges Securities and Estates & General Investment’s 20,000-sq ft development in Broadwick Street, which has been let to film and music distributors Warner Brothers at £47.50 per sq ft. This type of strong rental performance has led to an overdue review of Soho’s long-term potential as an office location.
In the past, many companies actively investing in commercial property had ignored Soho as an area for portfolio material because of the absence of new, high-quality accommodation, the comparatively poor rental levels and the generally seedy image historically associated with the red light district.
Until the early 1980s the typical Soho office was too poky and often too old and rundown to attract the interest of investors. Consequently the district remained something of a poor relation, falling between the twin peaks of the more illustrious West End and City office markets.
The Soho market, unaccustomed to the competitive forces prevailing in the City and Mayfair, was traditionally concentrated in the hands of a few landowners such as Peachey, the Sutton Settled Estate, the Crown Estate and the Prudential.
Their leases were chiefly left to the charge of historic tenants at extremely low rents and on relatively long leases. As a result the average rent for Soho in 1979 was a mere £7.
Undoubtedly the upturn in Soho’s fortunes was brought about by a combination of events. First, Westminster council’s determined attack on Soho’s “oldest profession” played a major role in cleaning up its image. This enabled the area to attract many of the new service businesses which sprang up during the early years of the decade as the economy revived.
A second factor was the phenomenal rental growth, charted by our own annual Soho office survey, which peaked in 1987-88 when average rents rose from £14 per sq ft to £26 per sq ft, a staggering increase of 86%.
This paved the way for the successful development of a handful of prestigious new offices by major forces in the property industry such as Trafalgar House Developments’ 18,000-sq ft building at 21 Soho Square, Haslemere’s 35,000-sq ft office in Dufours Place and United Kingdom Provident Institution’s 20,000-sq ft development at 27 Soho Square. These pioneer properties in turn helped to fuel further rental growth, increase demand and generally upgrade the reputation of the area.
Developments of this calibre have sustained investors’ interest in Soho despite the general stabilising of rents and the slowing of demand over the past year which have so adversely affected other West End and City areas.
In spite of the slowdown in rental growth, recent sales do indicate that quality office accommodation is still in short supply and top prices can be achieved, supporting the continued strength of Soho’s new-found status.
Two recent Speyhawk developments illustrate this trend: their Shaftesbury Avenue scheme has been sold by Langbourne to Swedish investors Trygg Hansa at a yield of 5.5%; and their five-year-old 20,000-sq ft state-of-the-art development in Dean Street, currently occupied by advertising agency Gold Greenless Trott, which has recently been sold to Scottish Widows, has similarly aroused considerable interest.
To judge from a recent spate of activity, overseas investors are also finding Soho to be a fertile ground for swollen pension funds, indicating that the area is now considered to be one of international interest. This has been a strong element in maintaining recent rental growth, albeit at reduced levels.
In the West End office market generally, growth in top rents has averaged 25% pa since 1985. For many overseas investors facing overheated home markets and unrestricted currency transfers, this has made London offices a far more desirable prospect. Nothing illustrates Soho’s arrival as a sought-after office location so clearly as its inclusion in such portfolios.
A good example of this heightening of interest is provided by the recent sale of 33 Golden Square, a new 18,000-sq ft office building to the Dutch investor VIB at a yield of 5%, which surprised the market. This building had been previously let to poster agency Moore O’Farrell at the peak rent for the area of £48.50 per sq ft.
Swedish investors have also been much in evidence, taking advantage of many existing opportunities. Much of this interest comes from property companies, private companies and one or two Swedish institutions.
Stancia, for example, bought a 150,000-sq ft building at 48 Leicester Square two years ago for £55m. The property has since undergone a rolling programme of refurbishment, with the most recent letting being to Bow Valley Exploration at £46.50 per sq ft.
However, active purchases in Soho have not been solely restricted to overseas interests. Companies such as Kleinwort Benson, Regentcrest (owned by the Richardson brothers), Derwent Valley and even private entrepreneurs such as Paul Raymond have all been rewarded with four years of tremendous growth which has justified their original confidence in the area. Average yields on Soho property are currently around the 7.5% level, comparing very favourably with Mayfair yields which are considerably keener.
Such enthusiasm, however, has not as yet been mirrored by those other avid investors, the Japanese. The chief reason is that Soho simply does not provide the size and type of landmark building which they favour in other areas of London such as Mayfair and the central City core. This is despite the pressure exerted by current yields — reported to be as low as 4.25% for freehold investments in such preferred prime locations.
In terms of building activity, completed developments have actually peaked in the past 18 months, although the number of such schemes has been relatively lower than in other areas because of local planning restrictions and the crowded nature of Soho’s more traditional buildings.
In the near future, the developments currently planned and under way in Soho will ensure that a steady, if somewhat limited, number of prime buildings will emerge from the pipeline in the early 1990s. In 1991 British & Commonwealth Properties expect to complete their 70,000-sq ft Great Marlborough Street office scheme. The following year will also see the completion of Norwich Union’s 30,000-sq ft development at 30 Golden Square and Lynton Holdings’ 40,000-sq ft redevelopment of 27 Broadwick Street.
Looking further ahead, London & New York’s ambitious scheme in Charing Cross Road is expected to be released on to the market in 1993 and Dormeuil’s proposed redevelopment of 60,000 sq ft in Golden Square is likely to be completed in the early years of the decade. The cumulative effect of these and other developments will serve to consolidate any lingering doubt about the area’s acceptability as a major West End office location.
Soho is undoubtedly an extremely interesting market about which to make long-term predictions. On the one hand the period nature of much of the stock in what is largely designated as a conservation area inhibits much longer-term and larger-scale development.
However, it is worth remembering that these planning restrictions have so far ensured continued rental growth on those prime ventures which have won consent, although the uniform business rate and prolonged high interest rates have inevitably taken their toll on general growth levels.
Conversely, its key position between the City and West End, coupled with the loyalty of the established media professions who have largely made Soho their favoured home, leads us to suggest that further rental growth and continued demand may be expected. In any event, for the foreseeable future the unique atmosphere of Soho is unlikely to change.
