London boroughs are to impose an affordable office policy that will force developers to subsidise space at a knock-down rent – similar to affordable housing provisions.
The move would hit firms’ profits and may make some projects unviable.
Hackney Council is now stipulating that 10% of new space has to be let at a discounted rent and is considering making the rule part of its generic planning policy. This means the requirement would be essential for all office schemes until 2033.
Islington has a looser policy of 5%, while Southwark and Wandsworth are also considering new policy. London mayor Sadiq Khan’s office is reviewing its options on affordable office space in the London plan.
Under Hackney’s policy, affordable rents are set at a variety of levels, with the space taken by firms on its list of affordable workspace providers. According to Guy Nicholson, cabinet member for planning, business and investment, the borough wants to ensure there is sufficient space for smaller innovative companies, particularly from the tech sectors, which are being pushed out by rents that are hitting £60 per sq ft.
Nicholson said: “What we are talking about is an economic model to foster innovation in the middle of a self-sustaining ecosystem. It is the system investing back into itself.”
The mayor’s office has been considering affordable workspace requirements since Khan made a manifesto pledge during the campaign to promote small businesses by helping provide start-up premises in housing and commercial schemes through the London Plan.
The Greater London Authority said that it was looking at policies for providing affordable workspace. Meanwhile, a spokesman for the mayor said that his office was working on its evidence for the new London plan.
The spokesman said: “Demand for office space in the capital is high and the mayor is keen to ensure that London remains open as the best place in the world to do business.”
Nicholson said he hoped a reference to the policy would be made in the London plan. He added, however, that the decision should rest with councils, with City Hall merely supporting the wider proposition.
Lobby groups, developers and planners have expressed doubts about the plan. Documentation seen by Estates Gazette suggests that the vagueness of GLA policy is of concern.
Charles Begley, executive director at the City & Westminster Property Associations, said: “More burdens would lead to higher rents to meet the cost of subsidy, or a reduction in the delivery of offices, which would add to price pressures.”
Sara Parkinson, policy director at London First, added: “What we would not want to see is a pan-London, one-size-fits-all policy that applies to all commercial property. That might have unintended consequences if not thought through.”
Gerald Kaye, chief executive of Helical, has said the idea would simply push up the cost of non-affordable space, “killing the golden goose”.
How the proposal would hit development profits
Any kind of affordable requirement would be deeply contentious if adopted as wider policy because it could reduce development profits.
Hypothetically, for a 100,000 sq ft scheme being sold off a 6% yield, rented at £60 per sq ft, a 10% affordable commitment at 70% of market rent could reduce end value by £3m and development profit by 20% (see below).
In areas that are beginning to see more offices built as residential values cool, it could even lead to values being tipped back in favour of residential development.
In Vauxhall, prices are around £1,200 per sq ft for offices and £1,400 per sq ft for residential. With an affordable housing commitment, offices are competitive.
• From July: Khan’s 35% affordable flat rate
• From October 2015: Idea of affordable workspaces is well-meaning but totally self-defeating
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