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Office occupiers told to expect higher fit out and servicing costs globally

Savills analysis of Q1 22 Prime Office Costs (SPOC) in global markets around the world has shown that higher fit-out costs, reflecting material and labour cost inflation, are beginning to creep through in some office markets.

While overall there has been no movement in the position of cities in the rankings since the end of 2021, says Savills, some markets are experiencing rising costs in fitting out space and increased service charges.

According to Savills this trend is most evident in Chinese cities, Kuala Lumpur, and in North American cities at the moment, but other markets across the globe are set to follow suit in the coming quarters.

Jeremy Bates, head of EMEA occupational markets at Savills, said: “From higher prices for raw materials to increasing labour costs to keep up with rising inflation, it’s likely that most office occupiers will have to pay more to rent and fit-out their space in global cities this year.

“Whilst rent is the usual indicator of increasing cost, service charge rises and higher capital expenditure will represent the largest contributions towards increased occupier costs in the coming quarters. Even in markets where landlords tend to pay for fit-outs, these costs will eventually be passed on to occupiers later in the form of higher rents. Nonetheless, for many office occupiers the expense is unlikely to deter them from selecting top quality spaces in prime central business districts to attract and retain talent, although they are carrying out extensive data gathering exercises on how employees are using space before making decisions on exactly how much to take.”

Savills says that overall headline rents have, on average, remained flat in local currencies and the increasing additional costs have yet to appear across many markets, according to the international real estate advisor, with fluctuating exchange rates due to increased uncertainty producing the appearance of declining costs for many markets in Dollar terms during the first quarter of 2022, while in local currencies they have broadly remained consistent with Q4 2021.

Read the Q1 2022 edition of Savills Prime Office Costs (SPOC)

Commercial property yields climb in 1H19 – Savills

Property specialist Savills’ latest Market in Minutes report has indicated that the UK’s average all-property yield has reached its highest level since November 2016 at 4.90 per cent.

Yields rose a quarter point across retail warehousing and leisure assets through July 2019.

The report also revealed that while investors are becoming increasingly active studiers of the UK market, particularly of the retail sector, transactional volumes remain low as they are largely waiting to strike at the ‘right’ price, although investment volumes in high street shops did tick up by 9 per cent in H1 2019 compared to H1 2018.

The main exception to the upwards trend of the last 12 months is the City of London office market, where prime yields hardened from 4.25 per cent in June to 4.00 per cent in July, supported by the sale of 8 Finsbury Circus, EC2M, to Singapore-based Stamford Land for £260 million.

Mat Oakley, head of UK and European commercial research at Savills, said: “The depth of interest and the prices we’re seeing being achieved on prime London assets indicates that there is a still a significant depth of demand for high quality commercial property. With these assets also continuing to deliver positive capital value growth, any further weakening of sterling in the second half of 2019 is likely to see additional demand unleashed and rising volumes. 

“There are also investors circling ready to buy distressed retail assets although the prices they’re willing to pay will have to be commensurate to the risks involved.”

Savills to manage Lasalle estate

LaSalle Investment Management has appointed real estate advisor Savills to carry out property and facilities management for the estate of the British Coal Pension Fund.

The portfolio of the British Coal Pension Fund includes over 100 properties comprising shopping centres, office parks, retail parks, industrial estates and London offices.

“Our decision to appoint Savills as the property manager on one of our key long-term client mandates was a natural extension to the work they already do for us across a number of PRS assets and reflects their proven track record in managing portfolios with complex properties that sit across asset classes and different sectors,” commented Rebecca Gates, head of asset management at LaSalle Investment Management.

Andrew Holden, director in the property management team at Savills, added: “The nationwide and mixed-use nature of the portfolio plays to our regional strength and sector specialist approach across retail and business space assets.”

Savills plc is a global real estate provider with over 700 offices and associates throughout the US, UK and Europe, Asia Pacific, Africa and Middle East.

Office Space

Savills: London’s outer boroughs can provide greater office flexibility

A report commissioned by estate agent Savills has suggested that London’s outer boroughs could provide greater office flexibility, as workers look for shorter commutes and a better working environment.

Spotlight: London Mixed Use Development suggests that the capital needs a combination of more homes and workplaces beyond central London, potentially offering a huge opportunity for office space located in the less congested London outer boroughs.

Rapid rent rises in central London locations, including City, West End and Docklands, while the outer boroughs have shown flatter growth, also adds to the attraction of office space outside of the city.

Croydon tops the list as the hottest market for office rental growth in London and the South East, with office rents expected to rise by an average of 27.8% a year over the next five years, surpassing office rental growth in the City and West End, but starting from a lower base.

Based on the latest estimates of office-based employment growth in London, the report suggests that an additional 4 million sq ft of commercial office space is required every year, equivalent to 1% of existing stock, or three buildings equivalent to The Shard per annum.

The estimate of demand, split between inner and outer London boroughs, also shows that a quarter of the additional office space will be required in the outer London boroughs – but current share of new offices in development, depending on timing of delivery, is only 7%, equating to around 2 million sq ft.

This figure will need to increase if the new emerging outer London office locations become reality.

www.savills.com

London’s high office space costs leading occupants to move South East…

800 450 Jack Wynn

According to the Annual Occupiers Survey 2016 conducted by the Royal Institution of Chartered Surveyors (RICS), the next five years will see South East-bound office occupiers expanding their portfolios at a faster pace compared to those in the capital.

Produced in association with Savills and EY, the survey found that 20 per cent of UK property decision-makers expect to increase the amount of office space they own or rent in the South East; in comparison to decreasing (seven per cent). In addition, a net balance of 13 per cent more respondents in the South East expect to increase rather than decrease their property portfolio – equating to almost double the seven per cent in London.

RICS director of UK commercial property professional group, Paul Bagust, said of the results: “Among those who expect to expand (41 per cent), more than half cited quality of facilities (57 per cent) as the key driver for selecting their office space. Proximity to transport links and amenities is the next most important (39 per cent), with a third (35 per cent) citing technology and digital connectivity.”

He continued: “The figures indicate those taking on more property are doing so to find better quality spaces, which are better managed, and are equipped to deliver greater value to business – helping with recruitment and contributing to the bottom line. Occupiers are undoubtedly getting smarter about understanding the value good, well-managed premises can deliver.”

Elsewhere, when asked about the importance of location and the quality of workplace premises impacting employee performance and satisfaction, the top five factors recorded in the survey are: pay and benefits (64 per cent); company culture and reputation (62 per cent); proximity to transport links and amenities (49 per cent); flexibility of working arrangements (43 per cent); and quality of premises and facilities (34 per cent).