After the bubble bursts

The crash of dot.com shares may mean that the Heathrow office market has topped out. But other lucrative trends await, writes Adrian Morrison In every area of life there are obstacles to be overcome and barriers to be breached. In the Heathrow office market, some pioneering agents see £431 per m2 (£40 per sq ft) as the next frontier – although how much credence that point of view is given remains debatable. In 1999, £323 per m2 (£30 per sq ft) was the challenge that whetted appetites in commercial property circles. However, that impediment has scaled and rents as high as £377 per m2 (£35 per sq ft) are being quoted, with expectations they can be achieved. But with the domineering hi-tech firms taking a share-price bashing in the USA, a question mark remains over how much further the boom will go, given this growth area’s influence on the shape of the Heathrow market. Hi-tech downturn In March the Nasdaq composite index dropped by 6%, and in the middle of this month market analysts recommended a shift away from new technologies and back to more traditional sectors. This in turn led to a share price boost for certain UK retailers, while technology stocks plunged. What this will mean for the Heathrow office market remains uncertain. In the property industry, commentators remain confident that there is still steam in the market and that share prices should not affect the growth of high-tech companies, which the prime office sector has thrived on in recent months. Some property professionals are even looking forward to a period of stability after stories of non-profitable dot.com companies achieving staggering flotation values. Andrew Vander Meersch, chief executive of the Stockley Park Consortium, remains confident that the quality of occupiers will ensure the future of the third phase of development at Stockley. He says: “If city share prices dip, that is one thing, but if the market continues to grow, why should demand go away?” He reserves his concern for the newer, smaller dot.com companies that are likely to thin out this year, but foresees no problems with the likes of Cisco or Adobe. However, Stockley is often seen as something of an exception in the marketplace. Landlords of other sites are still happy to look at to look at e-commerce companies, but with more hesitancy than before. Property owners were originally keen to become involved in profit-sharing schemes with dot.com and hi-tech companies, but this is largely a thing of the past. Kevin Cook of Vail Williams says: “The City is predicting that it will all go wild but I can see there being a good amount of time left in this market. “Many said the same thing about the service sector, which was slow to get off the ground but has now just gone crazy.” But Heathrow, as a location, is still a primary factor in attracting large US investors into the UK. There are many reasons why that type of company will continue to view Heathrow favourably – despite the dust finally settling about the real value of dot.coms. The Western Corridor now is to hi-tech what Cambridge is to bio-tech and the importance of the airport cannot be underestimated when considering this. The “clustering” of businesses in the Thames Valley can largely be attributed to Heathrow, and it will take something on the scale of an international recession to change this. In addition, being divided by a common language is infinitely preferable to being divided by a different language for many US firms. Rent bubble fragile However, many commercial agents concede that the rent bubble will have to burst – despite large occupiers’ determination to be located at Heathrow. Jon Milton of dohertybaines says: “At some point there has to be a slowdown in rental value.” But he does not attribute it to reduced market capitalisation. “I think a blip on the Nasdaq doesn’t seem to concern hi-tech companies. Some of these firms view it as quite positive as it clears much of the mass hysteria.” He adds: “The prospect still looks very good for the Heathrow area. If there is a downturn, the areas hit first will not be in such good locations.” He suggests that availability of stock is a greater factor in rents and occupier movement than fears in the City. Many firms looking to locate around Heathrow want more space with the option of reserving land for anticipated growth. This has led to more emphasis on the flexible lease, but this will always be at a premium. Vail William’s Cook is seeing a burgeoning secondhand market in the less prestigious office locations around Heathrow, mainly because that flexibility can be obtained at a lower rate. He says: “We have hit on the secondhand refurbishment market. Occupiers need to have flexible leases and they need to get into their buildings quickly. Money is not the object.” In addition, these older sites benefit from better parking ratios. This is a concern to some commercial agents and developers, who believe that when the economy does slow down, it will be to the exaggerated detriment of new schemes. Congestion must be tackled Gavin Davidson, executive director at MEPC, which developed Lakeshore at Bedfont Lakes, is vitriolic about the government’s attack on business, but acknowledges the need to address the congestion issue. He points out that it is not industry that drives cars but people, and feels that developers are seen as a soft target. “Our view is that the government has jumped on the bandwagon and have got it utterly wrong. What have they done about tolling roads and city centre charging? People drive cars and unless they address that, they are tinkering with the edges, and that is dangerous because it distorts the market,” he says. Alistair Elliott of Knight Frank goes even further when he suggests that the parking-ratio issue will drive occupiers off their present schemes. He believes that the hi-tech industry needs the option to expand and will be deterred if it cannot do so to its own requirements. “If you don’t provide the right sites, with the right planning – that means parking and public transport – then some of these companies will go overseas,” he says. Office developments Heathrow is still a primary factor in attracting US investors to the UK Ref Site Location Size (m2) Landowner/ developer Comments 1 Hayes Park Hayes 16,954 Tishman International Completed 2 Stockley Park Consortium Heathrow 46,450 Stockley Park Awaiting detailed planning consent for last phase 3 World Business Centre Heathrow 9,290 BAA Lynton Phases three and four 4 Lakeshore Bedfont 25,083 Hanover/Rutland Ready this summer 5 1 London Road Staines 65,03 Clerical Medical Completion May Source: Jones Lang LaSalle