On 22 March, for the first time in five years, the FTSE burst through the 6,000 level, breaching a major psychological barrier. But agents waiting by their phones for a deluge of enquiries were disappointed.
A few days later, Q1 figures confirmed what they already knew – a steady, even solid, start to the new year. Vacancy rates and availability tumbled, prime rents grew 4% to reach £50 per sq ft, and take-up figures, though unexceptional, maintained steady progress at 1.2m sq ft.
But where had the big deals gone?
Surges in property stock on the back of the chancellor’s optimism about REITS had driven the equities rally of late March but, since the start of the year, it has been the banks that have sustained growth. Backed by bumper profits, it has been one of thebest-performing sectors on the FTSE 100, registering 7% growth since January.
Experian employment forecasts also point to a steady expansion. In 2006, employment in City financial and business services will grow by nearly 1%, and continue rising by around 2% pa – or 275 people – for the next five years.
Agents believe that, as a result, merger and acquisition activity in the finance and banking sector will sustain the City’s office market. But if there is a connection, it is a very faint one.
Stephen Cater, partner in PricewaterhouseCoopers’ corporate finance business, says that M&A activity by both fund managers and the larger banks has stepped up a gear this year, but it has been sporadic. “A lot of the activity is cross border, with companies gaining access to new markets. For example, Banco Santander Central Hispano bought Abbey National, but it is keeping the business intact, so there is no property related issue.”
Looking at UK mid-market activity, Cater says: “M&A trends are so lumpy, so it is difficult to predict. But the economy is strong, and that’s leading to higher levels of M&A activity than we’ve seen in the past few years. But we are not yet at the levels seen at the top of the hi-tech boom.”
Requirements but no deals
Companies have swelled their ranks and continued to withdraw grey space from the market. Serviced office provider Office Planet reports demand for serviced offices in the City up from 11% in Q4 2005 to 17% in Q1 this year. Nearly half of the demand was from financial institutions.
“It’s good news for the property market in general,” says Philip Dodson, managing director of Office Planet. “Eighty-five per cent of firms leaving serviced offices take on a traditional lease, usually within 12 months of moving into a serviced office.”
Despite many requirements, actual deals have eluded agents. The largest deal done in the first three months of this year was for less than 100,000 sq ft.
“Big deals and where they come from is definitely something to watch,” says Sarah Bate, partner at Knight Frank. “We’ve seen a few big deals, such as investment adviser Amex at Victoria, SW1, and banker State Street in Docklands, E14, but the City has not. But there are still some decent-sized professional requirements.”
For example, PricewaterhouseCoopers is believed to be moving to Little Britain at 200 Aldersgate Street, EC1. Agents are watching JP Morgan and BNP Paribas, the latter rumoured to have a requirement for 200,000 sq ft.
But many multinational banks relocated to Canary Wharf in the late 1990s. James Young, partner at Cushman & Wakefield, points to Citigroup, Lehman Brothers, HSBC and Barclays. “Most of those big headquarters moves were done in the last cycle,” he says. “They do that every 25 years, so we are unlikely to see anything of that magnitude this cycle.”
Young predicts that, by the end of this year, take-up in the City will be largely unchanged on last year, which itself was in line with the 10-year average of 5.7m sq ft. However, he says take-up could reach 7m sq ft by 2007.
The City will need to watch competition from Docklands, which continues to snag footloose requirements. State Street signed the biggest deal since December 2004 with a 360,000 sq ft prelet at 20 Churchill Place, E14, this quarter. Insurer Aon is also to move to 10 Churchill Place. And KPMG is about to sign for 400,000 sq ft at Docklands.
Other large relocations on the horizon are Fortis Bank, which is looking for 150,000 sq ft, and ANZ with a requirement for 40,000 sq ft. Commentators believe they will eventually also settle for Docklands offices.
By comparison, Land Securities’ 1 Wood Street, EC2, has landed lawyer Eversheds’ 200,000 sq ft requirement. And legal firm Taylor Wessing is at the shortlist stage for 175,000 sq ft, with Milton Gate, EC2, reportedly top of its list.
Many, such as Mark Bourne, head of King Sturge’s City agency, believe such deals are the start of a “recovery proper”. He says City rents are improving, and that levels could reach £55 per sq ft by the end of the year. “This explains why occupiers are taking their time negotiating terms,” he says. “We are moving from a tenant to a landlord market. As tenants accept this, and succumb out of necessity, we will see take-up surge in the second quarter.”
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Q1 (% change on Q1 2005) Take-up 1.28m (-1.5%) Availability 11.54m (-20%) Vacancy rate 10.5% (down 2.6 percentage points) Forecasts for year-end central London,% change on 2005 Take-up 13.5m sq ft (+17%) Availability 14m sq ft (-27%) Vacancy rate 6.7% (down 2.1 percentage points) Vacancy rate, City 9.2% (down 1.2 percentage points) |
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Source: Knight Frank |
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Experian forecasts employment in the City’s financial and business sectors will grow by nearly 1% this year, and continue rising by 2% for the next five years |
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Source: Experian/Jones Lang LaSalle |
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Some City agencies expect rental growth of more than 15% by the end of the year. But what are the factors driving rental growth? |
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“There is a big push now in investment banks. Lehman Brothers and Barclays announced a 13-15% expansion in their core teams. They are underweight in emerging markets, but that means they are also increasing the headcount in their London teams” |
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“Just three years ago, most investment banks were cutting headcount and considering disposal options for large units of surplus office space. The positive news from across the Atlantic is already resulting in a rapid shrinking of banks’ surplus space and this is likely to continue over the next 12 months.” |
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“Professional services have been driving demand, but they don’t pay high rents. Financial services are going to be back inthe market in 2006, and they want profileand prestige.” |
