London office rents are rising faster than professional fees and could lead to an occupier affordability crisis in the capital, according to two separate studies by PricewaterhouseCoopers and CBRE.
According to PwC the hourly fees charged by lawyers are in reverse. The top 10 law firms saw hourly rates drop by 8.1%, and others in the top 100 have seen hourly fees fall by between 9.3% and 0.4%.
This does not mean law firms are on the brink of collapse – profitability is up. But that is because the fall in fee income is being offset by charging more billable hours – about 7% more, on average.
Yet there is a limit to what productivity improvements can deliver. PwC’s conclusion is that pressure on fees is undiminished, and profits per full equity partner still between one-fifth and one-third are behind the 2008 figures. More recent data suggests top-line revenue this year is up by just 2% – making bottom-line profit even more vulnerable
CBRE’s analysis points in the same direction.
Fast forward to 2017 and the business rates revaluation could be the final straw.
Over the past four months London landlords have been quoting an average of a 48% uplift in rent at lease renewal, according to CVS, the rates and rates reductions specialist. The looming 2017 business rates revaluation could also hurt London occupiers, based as it will be on values at 1 April 2015. “Given the general increases in rental levels, London offices can expect to see some of the largest increases in business rates when the new list comes into force,” says head of business rents, John Hayward.
With professional incomes under pressure, and London occupational costs rising, analysts are beginning to wonder what will give, and when?
