Recovery is the word on the lips of most West End office agents. And while last year was not the vintage year many predicted, it is one that agents will point to as proof of solid growth.
Business confidence returned as the FTSE 250 started to rise in August. According to Strutt & Parker, take-up in the West End core market reached just under 3m sq ft in 2004, up by more than a quarter on 2003.
Incentives have declined from nine months pa to two, vacancy rates hover at the 7% mark and rents registered the largest increases on the London market, growing by one-fifth to reach £67 per sq ft. Although growth in the all-important head count figures slowed last year, Experian predicts growth of 2.9% in 2005, leaping to 5.2% in 2006.
But it is not all good news. Developers’ reluctance to start construction in a slow market, alongside stiff planning policy, look set to strangle supply. With requirements from hedge funds now slowing and Mayfair nearing rents of £90 per sq ft, will occupiers look further afield to cheaper and more fluid markets?
The debate rages among agents over whether occupiers will actually move over to the City – but at least this prospect is now being discussed.
3i’s decision supports those optimistic about the West End’s recovery. Previously thought to be one of the few companies realistically likely to cross Kingsway, the venture capitalist settled for Victoria, signing up for 61,000 sq ft at Land Securities’ Cardinal Place. Jones Lang LaSalle, which acted for LandSec, believes this proves the West End’s strength. “Most of the competition said they’d opt for EC4 but, instead, we’ve got this endorsement of the West End,” says George Roberts, the agent’s national director.
But the smaller and more expensive end of the market could be about to undergo a quiet revolution. Hedge funds have driven headline rental growth, signing for units around 5,000 sq ft. As a result, they have cared little about the extra pound per sq ft. Now they are backing away from the property market.
Last year, 140 deals were signed at below the £40 per sq ft “bread and butter” level. Only five were signed at £80 per sq ft.
Economics are partly to blame, with the hedge fund market saturated by new entrants. As these expand organically, will they head for the City? This question splits the property industry. “As hedge funds grow and property becomes a bigger part of their cost base, funds will actively consider the City,” says Roberts.
He believes landlords need only look to New York for proof of occupiers’ mobility. Roberts explains that occupiers moved from Midtown to downtown as rental levels fell in the latter. He says the same value comparison could be made between the West End and the City. “Is the business case so much stronger to be in the West End?” asks Roberts. “I don’t think we are far off the tipping point.”
Other agents disagree. Hedge funds still account for 15% of demand in the West End, says Andrew Barnes, a director at DTZ. “These have sister companies in New York, keen to open up here as a result of merger activity.”
Guy Taylor, head of West End agency at Cushman & Wakefield Healey & Baker, agrees. He believes that while hedge funds went quiet last summer, “they are coming back, and we are getting a lot of viewings”. But he admits: “They can’t go on for ever.”
Looking for space
This will hardly be a disaster for the West End. Interest remains strong, with the government accounting for nearly one-third of all demand last year. Financial services, media (see box) and professional came in close behind, with roughly 20% market share each. Those now looking for space include Sony, consultant McKinsey and a slew of surveyors such as Knight Frank, JLL and King Sturge – representing requirements of nearly 310,000 sq ft.
Requirements are also turning into deals. Oil company Vitol signed up for 31,000 sq ft at Belgrave House. And the internet seems to be back, with Yahoo! committing to the year’s largest deal – 67,000 sq ft at Shaftesbury Avenue, W1. Apple also signed for a floor of Crown Estate’s new 1 Hanover Street, W1, echoing renewed confidence in IT stock.
But look closely at the deals being done. More than 90% of lettings last year were below 10,000 sq ft and, for true recovery, many in the industry think the West End now really needs some strong corporate deals.
“The corporate sector is noticeably absent,” says Philip Hobley, partner at Knight Frank. “Year-end figures were very healthy. However, this reliance on the typical West End churn of smaller units highlighted the absence of the 40,000 sq ft-plus requirements, which have more effect on market dynamics.”
Supply, or the lack of it, will only exacerbate this. Taylor says occupiers on the market, such as consultants Wellington and Boston, and financier Alliance, all want big floorplates but, of the 7.5m sq ft of stock available, there are only 12 buildings of more than 20,000 sq ft.
Six of these are being offered by occupiers, however. Taylor says these can no longer be seen as a reliable supply because, as the economy strengthens, occupiers could choose to stay.
“By 2006, there will be a dearth of supply – and that’s a great problem,” says Taylor. “We don’t want to go back to the days in 2000 where vacancy rate was 2%.”
As a result, landlords will have to turn to refurbishing stock. Simon Knights, partner at Strutt & Parker, says: “Landlords will have to actively manage space to make money. They’ve forgotten that’s what they’re meant to be doing.” There will be plenty of opportunity to do this, with Knight calculating that 18% of buildings in the West End have lease expiries due in 2005.
That said, large parts of key buildings in W1, such as Curzon Square, 10 Grosvenor Street and 40 Berkeley Square, remain empty. But Nick Rock, King Sturge’s head of West End offices, says: “When those top 1% are gone, there’ll be a shortage of buildings that command high rents.”
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After a tough couple of years, the media industry finally seems to be on the mend. This is good news for agents, which have relied on the slow trickle of smaller deals to keep the West End market ticking over. “We’ve been through the bloodbath and companies are starting to look again,” says Tony Parrack, partner at Edward Charles, “but we aren’t talking prime-rent payers here.” Rents will hit £30-£35 per sq ft in Soho and £25-£30 per sq ft in overspill area Noho, he says. The one black spot is post-production. “They’ve really had a tough time,” says Parrack. He believes these companies will continue to suffer high overheads and a leakage of contracts to lower cost, Far Eastern production companies. Large occupiers are also on the lookout for premises. Research by Strutt & Parker found that Soho’s top-20 occupiers are beginning to expand once more. Andrew Heath, partner at Strutt & Parker, says: “Some of these are starting graduate recruitment programmes for the first time in five years.” |
