Amid worries about the slowdown of the UK property market, this week’s tale of two city of London developers gave both bulls and bears plenty to chew over.
The short conclusion, however, is that the polarisation between the best property and the rest is happening at speed — and cracks are beginning to show even in the strongest portfolios. Landsec and British Land, the UK’s two largest developers, offered contrasting views of the office and retail markets.
While Landsec suffered its first full-year loss since the financial crash, with net asset value falling, property values at British Land grew in the same period. But digging deeper, common elements make interesting reading for a guide to the future. The property cycle may not have turned just yet but there are reasons to start worrying.
The results showed a key reason why the occupier market in London has remained reasonably buoyant — the shortage of prime office space — and this is linked to the rise of serviced offices such as WeWork. The US group is now one of London’s biggest occupiers — using cash raised at high valuations from tech investors to help prop up a market far from Silicon Valley — and spawned imitators across the capital, not least that now offered direct by British Land.
The serviced office sector accounted for a huge 17 per cent of demand for Landsec, versus a 10-year average of 5 per cent. About 3 per cent of its portfolio is now let to flexible office space. British Land said the sector could reach 10 per cent of its portfolio. This is still space that needs to be let. Here lies a big gamble. There is an implicit assumption that the office market is seeing a structural change, with the shift from long-term occupation to more flexible leases.
Agile working practices have undoubtedly been part of this shift. But there is another reading — that the popularity of shared offices is, in part, a symptom of corporate uncertainty and could, ultimately, prove a millstone for the market. Certainly, this would be supported by commentary from both companies that some occupiers are taking longer to come to decisions, in part owing to Brexit uncertainty.
Meanwhile, with prime office space relatively tight, so-called “second hand space” has been steadily climbing, according to Landsec. This is refurbished office space that tends to be cheaper to rent. Landsec said rents were in decline across several London “submarkets”.
Demand for shared offices is particularly fluid, with tenants able to move quickly to cheaper alternatives or scale back. The combination of needing to keep the growing glut of shared offices filled, amid higher proportions of second-hand space, could further weigh on rents. It certainly helps explain why shares in both Landsec and British Land are trading at about 30 per cent discounts to net asset values. Broader sentiment has also not been helped by retail failures in the property sector: Landsec said that retailers in administration made up 2.3 per cent of retail rents — not huge but noticeable. Both groups are representative of the better part of the market — prime assets, managed sensibly.
Executives noted that there was weakness elsewhere in the market. Next year, the FT will be part of the office take-up data: closing the doors to its home on the south bank of the Thames to move to a new home in the City at Bracken House. By then, the office market in the Square Mile might feel a different place.
Source: Financial Times
“Thank you very much BCC for the very impressive office refurbishment you have done for us. With experience in suspended ceilings and partitions your advice helped us to make the right choices for what we needed. The whole project was made very easy for myself.”
“We have used BCC a number of times and they deliver a very quick turn around but not sacrificing a very high standard of work. We will definitely continue to use BCC."