Annus horribilis: London has lost out to an extent that was unthinkable a year ago. But is everyone having a bad time? asks Stacey Meadwell
Just a year ago, had someone predicted that banks would be laying off thousands of staff, business giants would announce losses in billions and big-name property companies would be going to the market to raise cash, they would have been accused of believing too many doom-laden newspaper headlines.
What a difference a year makes. Credit – or the lack of it – is affecting all businesses in some shape or form, so London’s diverse occupier base is offering little comfort.
Nigel Bourne, director for London at the CBI, says: “Talking to businesses in London, the refrain is constant. Everyone is having a bad time, and the impact is being felt pretty much across the board.”
This year, it does not help that London is a globally important financial centre. According to the London School of Economics, 30% of workers in the Greater London area are employed in finance and finance-related jobs – the very sector that is being decimated.
The picture is made even gloomier by the fact that developers have some of their biggest, and now most fraught, development projects in the capital.
But tumbleweeds are not rolling down Bishopsgate, and the tube is certainly not quiet in the rush hour. Business is still being done, so who are the winners and losers?
Occupiers
There are many flattering statistics surrounding London’s economy. Of the Fortune 500 companies, 75% have offices in London, and 50% of transactions in the global foreign equity market take place in the capital.
What is less flattering is that, according to the Centre for Economic & Business Research, between October 2007 and October 2008, the number of “City-type jobs” in London reduced by 28,000.
Since October last year, that figure will undoubtedly have got worse. Aon, Merrill Lynch, Credit Suisse and Goldman Sachs are just a handful of companies with large numbers of staff in London that have announced major job cuts since then.
Then there are the professional services companies. The CBI’s Bourne cites law firms as an example: “The legal profession has got its corporate side with mergers and acquisitions. It had more work than it could cope with two years ago, but is now having to lay people off.”
The capital is also a popular base for media companies, but advertising and marketing budgets are the first easy cuts to make when times get tough. Job losses have not been on the same scale as the finance sector but, in January, Pearson, the publisher of the Financial Times, announced 80 job cuts. But businesses are still functioning in the capital.
Food and funeral services are said always to survive a recession – but probably more apt for London are the insolvency and accountancy sectors of the economy.
Indeed, it is not hard to wonder how well a company like PricewaterhouseCoopers is doing out of sorting out the Lehman Brothers’ messy demise. Likewise, London’s law firms have been boosting their insolvency departments as workloads inevitably increase.
Other sectors will also be in a stronger position, says Paul Guest, head of EMEA research at Jones Lang LaSalle. “Health will be a winner, and defensive industries, pharmaceuticals and education always weather the storm during a downturn,” he says.
How many of these companies will be expanding or taking new space is a different question.
Developers
Last week, London lost its status as the most expensive office location in the world. This is a sad reflection of the problems now faced by the capital’s landlords and developers, and anyone watching the newswires will not have missed the headlines pronouncing losses, write-downs and calls for cash through new shares.
Gauging just which companies will come through with the fewest wounds is difficult.
Harry Stokes, analyst at Citigroup, says: “The problem is that, at the moment, the valuation of these companies is almost impossible because there have been few transactions. Those that have happened may be, if not distressed, activated by a motivated seller, so you don’t know where yields are going.”
Hammerson, British Land and Land Securities have all had to refinance and approach the market with rights issues to raise cash. Whether they have any firepower to take advantage of low capital values will be answered only as the year unfolds.
So, who among London’s developers is in a good position?
Stokes picks three: Great Portland Estates, Derwent London and British Land. He explains: “GPE’s and Derwent London’s loan-to-value ratio is very low, which means that they can cope with greater value decline. Although British Land’s LTV is towards the top end – it is one of the highest in the major UK sector at about 60% – it has only an interest cover covenant. So long as rental income is covering interest, it is not breaching LTV, which puts it in a stronger position.”
He also believes that GPE’s reputation “for coming up with excellent deals” and managing assets puts it in a good position. “There is more chance of someone like GPE coming forward with a deal than, say, the bigger guys who, in the short term, need to protect their covenants,” he says.
How such deals will be funded depends on how they decide to raise cash. Neither GPE nor Derwent London have announced that they are going to the market for equity. It might be a bit late for that anyway, as a run of rights issues has mopped up much of the available cash and the appetite to buy. Selling is the alternative but, in a depressed market, properties will have to be carefully picked and marketed.
Regeneration
Developers do not have any money. Occupiers do not have any money. Public coffers can stretch only so far. “Pretty much all the regeneration models we have are built on an upward market, which isn’t going to work at the moment, and probably won’t for a couple of years,” says Mike Taylor, director and head of the London regeneration team at GVA Grimley.
So what is going to happen to London’s major regeneration projects during the recession? The consensus seems to be that projects with government-backed infrastructure projects will have an advantage.
“Those which I suspect are going to have the market behind them are anything with backing from the mayor, for example the Olympics, and the halo effect that the Games will have on schemes in that area, because of the development impetus and the fact that it has to happen,” says Taylor.
Indeed, Australian developer Westfield announced last week that it was putting all its developments on hold except one project in Sydney and its scheme in Stratford, east London.
Other projects that are riding on the back of major infrastructure investment are King’s Cross Central and Greenwich Peninsula, which had vast amounts spent on it in the lead up to the millennium.
Andrew Gould, lead director of professional and advisory at Jones Lang LaSalle, believes that these two projects plus Stratford and the Olympic site will work “if they provide product innovation in the same way that Canary Wharf worked by providing large floorplates”.
But, in a recession, will all come through unscathed? The regeneration of Elephant & Castle has an obvious question mark hanging over it. The project has a troubled history, having lost backers, and does not benefit from Olympics cash nor major public-backed infrastructure.
Neil Prime, head of agency at JLL, says: “Elephant & Castle is not well placed. The finance is not there to deliver this huge scheme. The base infrastructure cost is the killer. For example, in the region of £300m was needed at Greenwich.”
In its defence, Taylor points out that the project has been progressing for a long time and says he “would be pretty surprised if people walked away at this stage”. Indeed, the Homes and Communities Agency announced last week a cash injection to kickstart the redevelopment of the Aylesbury Estate there.
The Olympics is a bit of an anomaly as its timetable is set in stone but, that aside, any private-sector partners in major projects will inevitably be reassessing the financial viability of proposals.
Phasing and mix of uses will no doubt be tweaked on several schemes, particularly if retail or residential form major parts, but it will not come as a surprise if not all projects survive to see a market recovery.
