Crossing the threshold

Conditions are ripe for speculative office development, writes Tony Sutton.

The next two years could see the most favourable conditions for speculative office development since the last boom. Rents in many areas of the country have reached, or are approaching, the threshold levels required to trigger such schemes.

In central London, Prudential’s 30 Berkeley Square scheme could set a precedent for rental growth. It is expected to top £538 per m² (£50 per sq ft). Two other speculative schemes could also break the £538 per m² (£50 per sq ft) barrier: Development Securities’ 19,881m² (214,000 sq ft) 1 Curzon Street and NatWest’s 9,290m² (100,000 sq ft) at 1-2 St James’s Square.

Planning consent

The consensus among agents in central London is that developments are likely to be viable at rental levels of between £431 per m² and £484 per m² (£40 per sq ft and £45 per sq ft). So far, the highest rent is being paid in the West End – £453 per m² (£43 per sq ft) for 99 Bishopsgate. Development in the West End is expected, but perhaps not on the scale market conditions suggest. Since the last boom, major cities have accumulated a huge number of office sites with planning consent. London, for example, has 250 consents, each for at least 4,645m² (50,000 sq ft). If construction were to start on just a fraction of these, it would produce another glut.

Chris Perkins, Prudential’s associate director for central London investment, thinks that this is unlikely: “Developers are considerably more cautious since the last boom. They have learned and remembered well the lesson of oversupply.” He believes that developers are more rigorous on their initial appraisals. Because funding is considerably harder to secure, only the very best schemes will find money.

“We are far more focused on our development programme now and we will work on a few [high]-quality schemes rather than the splatter gun approach many of the big market players in the 1980s followed,” he adds. Prudential, which regards itself as the largest private investor in central London with £1.5bn of exposure, has only two schemes running – 30 Berkeley Square and Hasilwood House at 60 Bishopsgate, EC2.

In the late 1980s, probably six or seven Prudential schemes would have been under construction at any one time in central London. Perkins admits that “quite a lot of our stock does merit redevelopment” but says that Prudential is choosing only the best schemes: those with a minimum of risk. At present, this means the 4,831m² (52,000 sq ft) Berkeley Square scheme.

“It is probably going to be a barometer for the market and if there is to be a very low risk scheme anywhere we believe that this probably is it. We’re looking for a very steamy rent. We’ve carried it out entirely ourselves with no other party involved. We are the developer/ contractor and we will also be the investor, the holder of the property, when it is finished,” says Perkins.

Roger Lister of Richard Ellis’ City office believes that, at present, no scheme on his patch will work unless it is in a prime location. He points out that the only groups undertaking speculative development are those with money: the large companies; the big pension funds; and insurance companies who do not need to raise bank finance. “[Speculative development] is all in the core area of the City and none of the developments are huge,” adds Lister. He says that there is demand for schemes of more than 18,580m² (200,000 sq ft), but only if prelet.

Redevelopment go-ahead

John Forrester, DTZ’s head of central London offices, reckons that a best letting of £538 per m² (£50 per sq ft) will open the gates for redevelopment throughout central London. “We have seen a major leap in rents for the central City [area] at 99 Bishopsgate, with £463 per m² (£43 per sq ft) being recently achieved – this is a jump of £43 per m² (£4 per sq ft),” he says.

DTZ’s latest quarterly developers survey reveals the largest increase this decade of new space under construction in the City: up 15% at 306,570m² (3.3m sq ft), of which 70% is speculative. Jonathan Evans, head of DTZ’s West End office agency, predicts that demand for space will rise; this will be demonstrated by more lettings prior to practical completion. But he thinks that development activity will ease in the core areas because the market believes that sufficient stock is in the pipeline. “The only place [where activity] may improve is around the edges, the fringe West End locations, where it’s looking more achievable to get £323 per m² (£30 per sq ft).”

Awaiting evidence

Because of shortages of high-quality space, the M25 office market is forecast to produce fewer lettings this year compared with 1995. John Higginbotham of Grimley says that development activity – which is still limited – is concentrated in the north-west and south-west sectors. Threshold levels for development are put at £215 per m² (£20 per sq ft) which, he says, is being achieved, but the M25 market is waiting for evidence of sustained rental growth.

In the provinces, development is taking place in city-centre cores. In Leeds, Norwich Union’s £20m, 10,405m² (112,000 sq ft) No 1 City Square is the largest single office project ever undertaken in the city. “We are looking selectively at our portfolio and cherry picking the best sites for development,” says Norwich Union development manager Bob Delafield. “They have to be in towns where there is a shortage and demand is high.” Norwich Union has two other speculative office schemes under construction – the 3,716m² (40,000 sq ft) Oakleigh Place in Cardiff and 3,530m² (38,000 sq ft) at 176 St Vincent Street, Glasgow.

This is a far cry from the 1970s and 1980s when Norwich Union was perhaps the leading player in speculative development. The institution has a self-imposed limit on the number of speculative office developments it will undertake. A second wave of schemes is moving forward to planning consent stage. This includes the 9,290m² (100,000 sq ft) Essex House, Croydon, scheduled to go ahead in 2000.

Akeler Developments believes that it has a winning formula with its Doxford International Business Park located within the Sunderland Enterprise Zone. Akeler claims that this scheme is the largest of its kind in the UK. The latest plan is for three buildings totalling 11,148m² (120,000 sq ft) and finished to shell and core. “Financially, we knock spots off anyone else,” says chief executive Mark Glatman. “There are no business rates because it’s an enterprise zone. The City of Sunderland will give up to £1,500 for every new job created. The DTi throws in up to a further £17,000 per job in the form of capital grants because it’s a regional selective assistance area.”

Cost-efficiency

There is no available space on the park and its lower costs have encouraged many tenants to relocate from the South East. These include services companies not dependent on location, such as London Electricity and Mercury One 2 One. Akeler is quoting rents of £137 per m² (£12.75 per sq ft) for a fully air-conditioned building which, with incentives, comes down to £97 per m² (£9 per sq ft) for the first five years.

The trend is towards providing occupiers with flexible and highly cost-efficient buildings with large floorplates on 15-year leases. Mark Young of Dunlop Heywood in Manchester says: “We haven’t seen the sort of space that the very demanding and increasingly IT-sensitive and environmentally sensitive occupier is now calling for. And we do feel there is a very real demand for this quality of space.” Shell-and-core is proving to be an attractive option for occupiers. Developer Rouse Kent, which owns a 263ha (650 acre) mixed-use scheme at Kings Hill, near Maidstone, says that its Flex 2000 building allows occupiers to choose a combination of functions and fit-outs to suit their business.

As the market improves, Perkins and his contemporaries will be re-assessing speculative development in their quest to minimise risk still further. “It may well be that the prelet route is the answer,” he concludes.

Central London Development Pipeline