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Office Space

London office investment to hit £5bn in 1H 2019

Overall investment into Central London offices could total £5bn for the first half of 2019, down 39% on the same period in 2018 when £8.1bn was invested by the end of the half year. 

New research from retail estate advisor JLL suggests that a third of all transactions in 2019 to date came from UK investors.

Discussing the findings, Julian Sandbach, Head of Central London Capital Markets at JLL, said: “Political uncertainty is continuing to impact investor confidence at present, and this is most acutely felt by institutional investors who are particularly cautious due to uncertainty and understandably, risk. The irony of the situation is that the reverse is being seen in the occupational market where the volume of space let in the first half of 2019 is forecast to reach 4.3m sq ft, only 6% below the 10-year average.”

The research indicated that occupiers continue to show long-term confidence in Central London, recognising it as a global business centre, with global operators committing to space in the first six months of 2019, including Facebook, Sony Music, G research, Glencore, Milbank Tweed, ERBD and Brewin Dolphin. 

“London has a dwindling supply pipeline and although many cranes can be seen across its skyline a number of these developments have been pre-leased, with broadly 48% of the buildings under construction already let to future occupiers,” said Dan Burn, head of City agency at JLL. 

“The squeeze is more acutely felt with 2019 product where 59% of speculative construction is now leased. In addition, as occupiers vie for the best space, there is a significant amount of space currently under offer, totaling 3.8m sq ft which we anticipate will push leasing totals for the year towards 10m sq ft, in line with 2018. Looking ahead, the low levels of speculative pipeline combined with the sustained occupier demand, will continue the upward pressure on rental growth, especially as the vacancy rate on brand new buildings is 0.5%.”

Sandbach continued: “Undoubtedly the health of the leasing markets will provide an underlying level of confidence to investors, albeit much of this capital is sitting on the sidelines awaiting further clarification on Brexit outcomes. In 2018 inward investment was heavily dominated by Korean and Singaporean capital and whilst we have seen Korean investment recede from London this year, due to concerns from the securities firms to sell down their positions, we are yet to see a new international capital source emerge. Instead we have seen enhanced numbers of private individuals and family offices become more active, particularly in the West End, as a result of a reduction in levels of competition and a less crowded market and for the first time in many years UK buyers have been more active than any other group.

“Whilst investment transactional volumes are down, pricing levels have not suffered and yields have remained firm. The ever-decreasing supply pipeline coupled with strong levels of pre-leasing has led to intense competition for development and refurbishment opportunities across the capital. There is strong appetite from REITs, development managers and property companies seeking to reposition assets that will capitalise on the robust occupier demand and low future supply with pricing being driven hard by the strong competition.

“Furthermore, with London prime yields at an average of 4%, the arbitrage available over prime European cities at 3% is plain to see and for best in class assets, strong competition still exists.”

Global corporates ‘want flexible office space’

Two thirds of global corporates plan to increase their use of flexible co-working and collaborative space over the next three years, according to new research.

Knight Frank’s ‘Your Space’ report polled senior executives at 120 global companies which collectively employ in excess of 3.5 million people worldwide and occupy an estimated 233 million sq ft of office space, equivalent to the total amount of office space in Central London.

The reports shows global corporates intend to operate increasingly from flexible, serviced and co-working spaces, which, they says, create a more collaborative working environment and offer the freedom to expand and contract quickly according to market conditions.

The reports says that despite the proliferation of co-working and serviced office operators the majority of global corporates still occupy office space on a traditional lease model. Two thirds of companies surveyed reported that co-working, serviced and flexible office space comprise 5 per cent or less of their current office space. A small minority, less than 7 per cent, said that flexible workspace exceeds a fifth of their total workspace.

However, Knight Frank’s research reveals that the proportion of flexible space within companies’ portfolios is set to increase dramatically. Over two thirds, 69 per cent, of global corporates plan to increase their utilisation of co-working spaces, and 80 per cent expect to grow the amount of collaborative space they use over the next three years.

Furthermore, almost half (44 per cent), stated that flexible space will constitute up to a fifth of all office space in the next three years. An additional 16 per cent estimated that as much as half of their workspace globally would be flexible space within the same time period.

Over half of companies (55 per cent) identified increased flexibility as the main driver of this change, with a significant proportion (11 per cent) stating that the sense of community fostered among workers was the key benefit. A further 11 per cent stated that the greater speed to becoming operational was the primary reason for selecting co-working or serviced office space ahead of more conventional office space.

75 per cent of respondents stated that personal productivity linked to wellbeing and happiness, would increase as they shift towards a new flexible and collaborative model of occupancy that is more in keeping with today’s business structures and working styles.

Dr Lee Elliott, Global Head of Occupier Research at Knight Frank, said: “This research underlines that a decade of global economic uncertainty has reshaped how many of the world’s largest companies view workspace. Shorter business planning horizons, together with the emergence of new, more agile corporate structures has driven demand for flexible space which enables companies to react to change quickly.”

“While co-working and serviced office operators have grown rapidly over the past five years, driven largely by start-ups and the freelance economy, this is only the tip of the iceberg with latent demand from global companies set to emerge over the next three years.”

William Beardmore-Gray, Global Head of Occupier Services and Commercial Agency at Knight Frank, added: “The demand for flexibility is the single biggest threat – and opportunity – to owners of office space. The recent boom in co-working is indicative of a structural change within commercial real estate whereby companies desire space that is flexible, highly serviced and aligned within the realities of doing business in an age of disruption. Some co-working operators have capitalised on this already, but it is imperative that owners and developers react to the new reality where customer is king.”

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 Bridge

London becomes world’s third most expensive city for office space

The UK’s capital is among the top three most expensive cities in the world to rent office space, with New York topping the list and Hong Kong a close second.

Beijing comes in fourth position, just ahead of Shanghai. The figures were compiled by Kit Out Of My Office which analysed a report published by Colliers on office rental prices throughout the UK and the rest of the world.

The report looks at the cost of leasing office space of 10,000 square feet and associated business costs, such as service charges, property tax and internet access, over a 10 year rental agreement.

However, the report also points out that for businesses looking to relocate or start up in London, initiatives and grants were available, such as the Enterprise Investment Schemes and R&D tax credits.

The report goes on to add that London “cannot be instantly dismissed as it is Europe’s most accessible city, thanks to excellent transport connections, with over eight million Londoners and world-class universities for you to choose your workforce from.”

Stoke-on-Trent toped the survey as the cheapest place to rent office space in the UK, at £10.25 per square foot, three times cheaper than Manchester at £29.75.

Sara Williams, chief executive of Staffordshire Chambers of Commerce, said: “Our office space facilities are extremely competitive compared to the national average prices but we do not compromise on quality. “When you combine our geographic location in the heart of the country and easy access to the motorway, with the competitive office rental prices, this can only be good news in terms of attracting companies to the city.”

Picture Credit: Paul Kennedy Photography

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).