The cost of having an office in London continues to soar. The total occupancy cost of offices in Mayfair and St James’s has now reached £175 per sq ft, according to Cushman & Wakefield. That is more than three times the cost in Manchester and compares with £64.74 per sq ft in Paris and £38.62 per sq ft in Frankfurt.
But what does this mean for London’s competitiveness as a global city? In KPMG’s latest Competitive Alternatives study, the UK slipped from fourth place to seventh in a ranking of countries’ business cost competitiveness. Although the drop was due partly to exchange rates, London’s spiralling office leasing costs were key to the fall.
Those costs are forcing a growing number of London occupiers to question whether they can justify the expense of locating staff in the capital.
Stephen Peers of the West End leasing team at Gerald Eve, says: “The sheer scale of rental growth in recent years will cause a major psychological jolt when occupiers approach a rent review or lease expiry. People are now taking a much harder look at what they are being asked to pay.”
Although few businesses have turned their back entirely on London, a growing number are relocating back-office operations to lower-cost cities in the UK.
Law firms have been the most active in moving routine work and support functions to the regions. In 2011, Allen & Overy relocated 180 London staff to Belfast; in 2014, Hogan Lovells set up a Birmingham office as part of a strategy to reduce its London headcount; and a year later, Freshfields Bruckhaus Deringer committed to an 80,000 sq ft office in Salford, Greater Manchester.
The banks have also looked to save costs. HSBC is moving around 1,000 staff from Canary Wharf to Birmingham and other banks are said to be considering relocating staff to key regional centres.
“London occupiers are now far more analytical about who they employ where,” says Digby Flower, Cushman & Wakefield’s head of London markets. “They will continue to employ their best talent and client-facing staff in London, but as far as they can, will relocate support services elsewhere.”
It remains to be seen just how much of an impact this phenomenon will have on London’s occupational market.
Knight Frank chief economist James Roberts says: “Once an organisation has moved its back-office processing functions out of London, more para-professional roles in HR, marketing and IT might come into focus. Cities such as Birmingham, Manchester and Bristol with good universities are the most likely locations for mid-market jobs transfers.”
London occupiers will have to weigh up the benefits of remaining in the capital against the cost. For some, the tipping point may come next April when the new business rates revaluation comes into force.
The new bill will be based on valuations made in April 2015. Occupiers in places such as King’s Cross, Shoreditch and Clerkenwell, which have seen rents rocket since the last rating revaluation in 2010, will experience an increase in occupational costs of more than 100%.
“At the moment, the rates revaluation is a hidden cost, but when the bill hits doormats next April, many occupiers will be hit with a bombshell,” says John Hayward, head of the business rent surveying team at CVS.
Many of London’s indigenous businesses will choose to take the hit.
“The real challenge for business today is the war on talent and many occupiers are prepared to pay a high price for it,” says Colliers International director Stuart Melrose. “London continues to attract global talent and that is unlikely to change any time soon.”
While lawyers and bankers are moving functions out of the capital, the likes of Amazon and Facebook are being drawn to London to access high-calibre staff.
Media and tech occupiers in particular are willing to pay a premium for the best talent. Although regional cities are trying to create their own tech clusters, they will take time to mature and for the foreseeable future won’t persuade great swathes of businesses to leave London.
More likely is that occupiers across all sectors will seek better value for money by exploiting London’s hinterland.
Improvements in infrastructure will help London extend its boundaries and accommodate businesses with different budgets. Crossrail will open up east London as a more viable alternative to occupiers who might otherwise have decamped to the regions.
It is hoped that the extension of London’s boundaries will not only protect competitiveness by providing cheaper business space, but also boost the stock of affordable housing.
“When it comes to London pricing itself out of the market, the cost of housing is an even greater concern than the cost of office space,” says CBRE executive director Mark Pollitt. “As residential costs go up, employees require ever-larger salaries.”
KPMG head of housing Jan Crosby says London’s housing crisis is threatening its business competitiveness and occupiers will need to find innovative solutions. He says: “In the next few years, I would expect to see London PRS nomination agreements, whereby large businesses commit to filling a certain number of beds as a way of ensuring their staff have somewhere affordable to live.”
However, Yolande Barnes, head of world research at Savills, says: “In the end, occupational costs in London wouldn’t be so high if there wasn’t such demand. Rents are linked to the economic productivity achieved by being there.”
KPMG’s Crosby adds: “Whatever the challenges it faces, London is London. As long as the city has a welcoming attitude to global talent and wealth, it will continue to do well.”
Manchester’s competitive edge
Manchester is offering a viable alternative to occupiers looking to relocate staff out of London. KPMG’s latest business competitiveness ranking found that while London’s business costs were the highest of the 10 European cities surveyed, Manchester’s were the lowest.
The city’s credentials have helped it attract major names. Since opening its global service centre in Manchester in 2005, BNY Mellon has increased its headcount to more than 1,100 people.
Others have followed suit, particularly law firms drawn to the city as a location for lower-margin functions. Berwin Leighton Paisner and Latham & Watkins have committed to opening offices in the city, while Freshfields Bruckhaus Deringer is to open an 80,000 sq ft global service centre at Salford’s One New Bailey.
“There is a rumbling from London businesses that feel their margins are being squeezed, and Manchester is set to benefit,” says James Evans, head of Savills’ Manchester office. “The appeal is as much about people as lower rents. Staff costs are lower and Manchester’s graduate pool makes it easier to attract and retain talent.”
Cushman & Wakefield’s Manchester office head John Keyes says: “Manchester has a great story to tell. At first, occupiers will mainly bring back-office facilities to the city, but once they see what the city has to offer, they may well extend that to higher value work.”
