by Paul Ives
Recent research has highlighted the intensive clustering of foreign-owned companies in central London. This pattern is largely a reflection of their strong preference for traditional office locations, and subsequent decisions to move office premises have reflected this conservative attitude towards location.
This article analyses, in greater detail, the last (most recent) moves of the 100 foreign-owned companies contacted for the purposes of that survey in central London. (The analysis, however, excludes companies still occupying their first London address or those who moved into, or out of, central London on their last move.)
In our sample 60% of companies were able to give sufficiently detailed figures to be included in this analysis, and their pattern of premises moves breaks down in the following way:
This split shows a clear conservatism of location when planning changes of accommodation with nearly 90% of moves being over short distances and only one in 10 companies moving more than a couple of miles. It is, however, interesting to break these figures down further, by region of origin.
Regional pattern
The table below depicts the breakdown of movement within central London, by a company’s region of origin. It immediately becomes apparent that it is the North Americans who have been the most adventurous; 40% of most recent moves by Canadian and American firms — more than any other category — leapfrogged at least one postcode to their new location. This pattern contrasts with that of all other major players, especially the Japanese, who were as conservative as the North Americans were adventurous.
These trends tend to be a reflection of size of operation. The number of staff and floorspace occupied by Japanese banks and security houses is only a fraction (around 10%) of their North American competitors, who have been established here much longer.
Consequently, the space cost savings derived by moving from expensive City premises to cheaper West End locations have been considerable for major space-users such as the North Americans. In the pre- Big Bang years of 1985-86 — years seeing the bulk of such moves — Victoria rents, for example, were below £20 per sq ft, compared with an average £40 per sq ft in the City. The Japanese, however, have not followed suit — a result of size, and caution arising from their relatively recent arrival on the scene.
Some interesting points emerge from this analysis. First, although the banking sector has been noted for some of its cross-town relocations, these make up only a small proportion of the sector’s total number of moves.
Second, manufacturing companies are much more likely to stay in one place; their comparative inertia is probably a result of the London office comprising a much smaller part of the company’s operations than in other sectors and, therefore, frequent upgrading of premises has a lower priority. When such companies do change their premises, however, they are much more likely to make long-distance moves than those in other sectors.
Relatively higher levels of cost-consciousness tend to lead to similarly higher levels of decentralisation from London; only 46% of manufacturing companies consider a London HQ essential, compared with, for example, 86% (media) and 92% (in the banking sector).
Lastly, the insurance sector is the least footloose of all, exhibiting strong, historic locational ties to EC3, although it was frequently emphasised in our conversations with such firms that the London office is often only the registered office, employing relatively few in comparison with large administrative operations in cheaper satellite towns in the South East. This fact probably explains why a limited number of such firms have been sufficiently troubled by high rents to move from London’s traditional insurance quarter.
Postcode preferences
Switching the focus of our analysis to geographic preferences — as defined by postcode — we examined their record in retaining foreign-owned companies which had previously located there and subsequently moved premises. The table (“Most recent moves”) thus ranks each postcode in order of the loyalty it engenders:
It is clear that EC3 and W1 command the greatest loyalty. As these areas also demand the highest rents from occupiers, it is apparent that location tends to be more important than cost among foreign companies when moving. Those companies who have secured premises in a prestigious area (EC3, EC2 and W1, for example), will rarely accept a more fringe location when moving, as this may appear to be a move downmarket.
Some areas such as E1 and SE1, however, have yet to attract a significant number of overseas-owned companies, once again reflecting foreign conservatism of location, clustering, and a greater willingness to pay the highest rents in order to be seen in the “right place”.
The following tables show the winners and losers in this intra-London movement.
An interesting pattern emerges from the data which suggests foreign-owned companies have been moving towards the more central postcodes bordering the Thames. It is clear from the attached figure that the overall locational pulls for foreign-owned companies are centripetal, in contrast with the centrifugal forces which are increasingly prompting UK companies to relocate out of the capital. The magnetic effect of this centralisation is likely to increase as rents stabilise in the wake of the supply boom currently filtering through, particularly in the City.
Outlook
Future demand for alternative premises may well be led by Japanese companies, as the following table illustrates: 58% of Japanese firms contacted during the course of our survey were still in their start-up London premises, suggesting a considerable potential for future moves and expansion.
Furthermore, although the majority of Japanese banks are in place, there could be a significant number of new arrivals in the form of Japanese life assurance companies. Such firms are beginning to inject their vast funds into London office property — investments often involve Japanese tenants and developers as well as investors — and are likely to manage their investments from London offices.
There may also be increased demand from US firms positioning themselves for the Single Market in 1992, with an influx of European companies who are currently prevented from trading abroad due to national regulations.
In London, West End supply shortages are likely to push rents up, whereas the rising supply of offices in the City is likely to moderate rental growth in the Square Mile. One result of this could be that US companies who moved to the West End in the mid-1980s are likely to be faced with some hefty rent reviews which will be due in 1990-91, and could be tempted back to the City. At the same time, the number of small growing companies could also lead to a brisk market in medium-sized (less than 100,000 sq ft) offices in prime locations, stabilising market rents and releasing smaller premises for newcomers. The net effect is that the current one-third of lettings being taken by foreign-owned companies, particularly in the prime areas, is more likely to increase than decrease.
Paul Ives MA is a research analyst within Edward Erdman’s Research Department.
