The property boom that has gripped the central London office market can be attributed, in part, to the boom in the financial markets over the last four years. But multiple observers say London isn’t just riding this wave; it is also threatening to topple New York from its position as the world’s leading financial center.
“Financial groups from all over the world have been expanding in London’s financial districts, and developers have responded by building,” said Bradley Baker, head of central London tenant representation for Frank Knight, the real estate brokerage. “So far, developments have let quickly in the final months of construction. A recent example is Bow Bells House, which over the summer has been taken by two European banks, with completion scheduled for December.”
In the city alone, there is almost 6.5 million square feet of speculative office space under construction over the next four years, and a further 6.1 million in the pipeline.
Strong interest in the London market from both property investors and businesses looking for office space has led to yields being squeezed as prices rise even faster than rapidly rising rents. Since the first quarter of 2003 — when stock markets reached their nadir — yields in the city have been compressed from 6.25 percent to 4.75 percent, while rents in the West End have risen from $138 to $220 a square foot. (Average rents in the West End are approaching three times the level of rents in midtown Manhattan, where average asking rents were around $82 a square foot in September, according to data from CB Richard Ellis.)
“London has always been a very liquid real estate market, which is very attractive to investors because it means that when you want to sell, it’s easy to do because of the capital inflows from around the world,” said Anthony Barnard, a partner in the West End investment division at Knight Frank.
London’s appeal to international investors has, however, grown even more rapidly in recent years as commercial real estate has gained in popularity among global investors, particularly from the U.S.
“Over the last 12 months, around 20 percent of the investment in London has been with U.S. money,” said Piers Wheeler, an associate in the international investment department at Knight Frank.
Wheeler indicated that Middle Eastern and Irish investors have also bought heavily in the West End.
The most active investors have been the so-called opportunity funds — essentially the real estate equivalent of private equity funds — from the U.S., like Rock Point and Beacon Capital.
One fund controlled by Tishman Speyer, the New York City-based real estate heavyweight, is a key player in the London market. It is heavily involved in the development of commercial office space in the city.
One of its larger projects on the drawing boards is Aldgate Place, a 790,000-square-foot project within spitting distance of the Gherkin, the iconic London office building designed by Norman Foster. The scheme will comprise three buildings: a 20-story and a 22-story tower, joined by a low-rise building.
Tishman Speyer has said, however, that it will not go ahead with the development without first securing an anchor tenant. This caveat to the development is crucial in light of the recent global credit crunch resulting from the collapse of the U.S. subprime mortgage market. If the crisis sparks a broader slowdown in the overall economy, Tishman, like other developers, might decide to shelve its plans.
Agents said market players are nervous, and this uncertainty is reflected by the slowdown in recent deals done by U.S. investors. “All investors, not just those from the U.S., are trying to work out how far the knife might fall,” said Wheeler.
The problems brought about by the credit crunch have been compounded by the weakening of the dollar, making investing in London even more expensive.
Because of this, there are fears the cranes presently dotting London’s skyline might not be replaced by gleaming new buildings. But London real estate pros said they are confident the long-term health of the capital remains excellent, and the city will remain a serious competitor to New York.