Tuesday 23 January 2018

London office boom sees return of speculative building

The view across London from the Leadenhall Building, better known as the Cheesegrater. Spiking office rents have prompted developers to build without signing tenants
The view across London from the Leadenhall Building, better known as the Cheesegrater. Spiking office rents have prompted developers to build without signing tenants

Patrick Gower

Central London developers are increasingly willing to start office construction without tenants in place, betting that today's surging demand won't fade.

Companies started 31 projects in the six months through March, the second-highest amount in 20 years, according to a survey by Deloitte. Of those, 22 had no tenants at the outset. New construction jumped by 24pc.

"We expect further rises in rents and more pre-let deals on schemes under construction," said Anthony Duggan, partner and head of real estate strategy at Deloitte. "We expect the development pipeline to continue to increase as developer confidence translates to more active construction sites across London."

A dearth of development during the financial crisis has left London companies competing for a dwindling amount of space.

Central London office rents will climb the most since 2000 this year, according to BNP Paribas' real estate unit.

London's biggest office developers include British Land, builder of the skyscraper nicknamed the Cheesegrater, and Land Securities, which developed the tower known as the Walkie Talkie and owns the property in a partnership with Songbird Estates.

The new projects more than doubled the development pipeline to 9.5 million square feet. Of the space being built, 37pc has been rented in advance.

"We still anticipate any development commitments beyond the current programme will be based on pre-lettings," said Land Securities chief executive Robert Noel said in a statement.

The 10 construction starts in the City of London financial district accounted for 39pc of the new work, the most of any area. Central London areas in the survey included the West End, the Docklands, Midtown and King's Cross.

Land Securities the U.K.'s largest real estate investment trust, reported full-year profis that increased as an acquisition boosted its rental income.

Profit excluding changes in asset values and one-time items rose to £329.1m in the 12 months through March from £319.6m a year earlier. Adjusted net asset value per share increased 27.6pc to 1,293 pence a share.

The developer of the Walkie Talkie is benefiting from rising demand for City of London offices at a time when few new properties are coming onto the market. Prime rents in the financial district increased by 14pc over the past two years as available new and refurbished space reached a 10-year low.

"We are determined to maintain financial strength during this program of significant investment," said chief executive Rob Noel.

Land Securities climbed sharply in London trading, the highest since 2008. Before this week, the shares had gained about 23pc in the last 12 months, while the benchmark UK FTSE 100 index increased 1.4pc.

Rental income was boosted by the company's acquisition of a 30pc stake in the Bluewater shopping centre in Kent, England, the company said.

Adjusted earnings per share rose to 41.5 pence from 40.5 pence a year earlier. That compares with 42 pence, the average estimate of 20 analysts.

Net income more than doubled to 2.3 billion pounds as gains from property values jumped to 1.77 billion pounds from 607 million pounds a year earlier.

While Land Securities has benefited from starting developments without tenants in place, the company is now focusing on building properties after renters are secured, Noel said in the statement. The value of properties under development increased by 38.7pc, the company said.

Land Secs strong numbers are but the latest indicator in the strength of the London commercial property market, which is showing few signs of slowing down even as concerns climb about the future of the city's residential market.

Rents are back at all time highs for the prime office sector, with space in the Square Mile and Canary Wharf now exceeding prices seen at the peak of the previous cycle in 2007.

Those numbers have prompted an influx of investment from overseas, with vehicles including Qatar's sovereign wealth fund especially acquisitive. (Bloomberg)

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