Office rents soar as new skyscrapers rise in city

The capital's commercial rental market is recovering rapidly after a bruising decline during the recession, reports Nikhil Kumar

UBS did it in the summer and now, just months later, Bloomberg has followed suit. One after the other, the two have decided to put money in the City. We are not talking about some fancy new financial instrument. No – the pair have decided to invest in bricks and mortar in London's Square Mile, heralding a revival in the capital's office market.

Back in August, the Swiss investment bank agreed a deal to house its new London headquarters on the sprawling Broadgate Estate, owned by the developer British Land and the fund manager Blackstone.

Two existing buildings will be knocked down, paving the way for a new unit boasting more than 700,000 square feet of floor space for the Swiss group's legion of traders and bankers. UBS will rent the property at an initial headline rate of £54.50 per square foot on a weighted average lease of around 18 years.

Earlier this week, we learnt that Bloomberg was following suit with plans for its own European head office in Walbrook Square. The financial-information provider said it had agreed to buy the site, a stone's throw from the Bank of England in Threadneedle Street, from Legal & General, and planned to build two new buildings – one to house its offices and one a speculative development. The architect, Lord Foster's firm Foster and Partners, has been drafted in to design the new headquarters, which will contain more than 500,000 square feet of office space.

The investments come against a pick-up in developments. Commuters passing by London Bridge will have noticed the growth of the Shard, the giant, 72-storey glass-and-steel tower which, when it is completed in 2012, will, at 310 metres (1,017 ft), be Europe's tallest building, and which has been going up at a breakneck, Jack-and-the-Beanstalk-like pace in recent months.

It is part of the London Bridge Quarter, which will cover approximately 2 million square feet of mixed-use space. It will consist of the Shard, and the London Bridge Place office building. When completed, the latter will boast a gross area of 600,000 square feet.

Beyond the Shard, there is the 242m (794ft) Heron Tower, which is due for completion next year, and the Leadenhall Building, nicknamed the "Cheese Grater" owing to its wedge-like shape, which is due to be completed in 2014. In the coming years, City folk can also look forward to the Pinnacle, otherwise known as Bishopsgate Tower or the "Helter Skelter", and the so-called "Walkie Talkie" at 20 Fenchurch Street.

But the developments do not mean that the City will suddenly be awash with excess office space. In fact, the supply-side picture remains encouraging, as the development pipeline was effectively turned off when the economy slumped two years ago, according to the real-estate consultant DTZ, which expects prime City rents to rise to £67.5 per square foot by the end of 2014.

For 2010, prime City rents are expected to end the year at £55 per square foot, up by more than 26 per cent on the £43.50 at the end of 2009, according to DTZ. Take-up has also been strong, with people acquiring some 5.7 million square feet of space so far this year. Interestingly, that figure excludes the Bloomberg Walbrook announcement, which, if factored in, would take the total for 2010 to over 6 million square feet, comfortably above the long-term average of 5 million per year.

The gains in the London office segment have been driven by a combination of limited supply of space coming on to the market and strong demand from the financial-services industry, which has taken up more than 50 per cent of the space in the City. Lawyers and insurance firms, have also supported the market, according to DTZ. The strength is reflected in figures complied by the commercial-property researchers at Investment Property Databank (IPD), who also highlight the volatility of the City market. On IPD's numbers, the peak-to-trough slump in capital values in City offices was 45.5 per cent, while West End offices and the broader property market experienced a 42.4 per cent decline during the recent slump. But if City office prices fell fast, they also swiftly rebounded as the economy and investors began to regain composure.

Values bounced back by 23 per cent in the 15-month period from the beginning of the third quarter of last year to the end of September this year. The West End had a stronger, 27.1 per cent rebound. The broader market, on the other hand, recovered by only 17.4 per cent .

The one gauge that sums up the story, according to Phil Tily, IPD's UK & Ireland managing director, is the yield on prime central London offices. It has compressed back to pre-credit crunch levels, he says, adding: "Strong demand from financial services and [a] slowdown in the supply of new space ... [has] created a perfect cocktail."

Looking ahead, Land Securities, the FTSE 100-listed group behind the "Walkie Talkie" , expects demand to stay firm, pointing to factors such as the higher-than-normal level of lease expiries due from 2013, particularly in the City, and growing demand for new or newly upgraded properties as tenants seek more energy-efficient and better-equipped buildings.

The developer is not alone. The analysts at Morgan Stanley are also hopeful about the road ahead. In a recent circular to clients, they put City offices ahead of shops, shopping centres, retail warehouses and industrial properties, forecasting 8 per cent rental growth next year.

Their predictions for the West End office market are similarly bullish, while overall, they expect the broader market to see rental growth of 5 per cent. The outperformance is expected to persist, with City and West End offices forecast to record higher-than-average growth of 5 per cent in 2012. In contrast, the overall property market is expected to see 4 per cent growth.

"We think that in 2011 London offices will be yet again the strongest-performing asset class," they said, no doubt inducing a satisfied smile or two at UBS and Bloomberg.

London offices in figures

5.7million The amount, in square feet, of City office space taken up so far this year. The long-term average is 5 million per year.



£55 The level per square foot at which prime City rents are expected to end 2010.



26 per cent The anticipated rise in prime City rents this year. They stood at £43.50 per per square foot at the end of 2009.



45.5 per cent The peak-to-trough decline in capital values in the City office market during the recession.



23 per cent The recovery in values in the 15 months to September.

PROMOTED VIDEO
News
ebooksAn unforgettable anthology of contemporary reportage
Voices
Oscar Pistorius is led out of court in Pretoria. Pistorius received a five-year prison sentence for culpable homicide by judge Thokozile Masipais for the killing of his girlfriend Reeva Steenkamp
voicesThokozile Masipa simply had no choice but to jail the athlete
Arts and Entertainment
Sister Cristina Scuccia sings 'Like a Virgin' in Venice
music

Like Madonna, Sister Cristina Scuccia's video is also set in Venice

Arts and Entertainment
James Blunt's debut album Back to Bedlam shot him to fame in 2004
music

Singer says the track was 'force-fed down people's throats'

News
i100
Life and Style
The Tinder app has around 10 million users worldwide

techThe original free dating app will remain the same, developers say

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior Pensions Administrator

£23000 - £26000 Per Annum: Clearwater People Solutions Ltd: Our client is curr...

Corporate Actions Administrator / Operations Administrator

£25 - 30k: Guru Careers: A Corporate Actions Administrator / Operations Admini...

Customer Service Executive / Inbound Customer Service Agent

£18 - 23k + Benefits: Guru Careers: We are seeking a Customer Service Executiv...

ASP.NET Web Developer / .NET Developer

£60 - 65k + Benefits: Guru Careers: We are seeking a ASP.NET Web Developer / ....

Day In a Page

Two super-sized ships have cruised into British waters, but how big can these behemoths get?

Super-sized ships: How big can they get?

Two of the largest vessels in the world cruised into UK waters last week
British doctors on brink of 'cure' for paralysis with spinal cord treatment

British doctors on brink of cure for paralysis

Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells
Let's talk about loss

We need to talk about loss

Secrecy and silence surround stillbirth
Will there be an all-female mission to Mars?

Will there be an all-female mission to Mars?

Women may be better suited to space travel than men are
Oscar Pistorius sentencing: The athlete's wealth and notoriety have provoked a long overdue debate on South African prisons

'They poured water on, then electrified me...'

If Oscar Pistorius is sent to jail, his experience will not be that of other inmates
James Wharton: The former Guard now fighting discrimination against gay soldiers

The former Guard now fighting discrimination against gay soldiers

Life after the Army has brought new battles for the LGBT activist James Wharton
Ebola in the US: Panic over the virus threatens to infect President Obama's midterms

Panic over Ebola threatens to infect the midterms

Just one person has died, yet November's elections may be affected by what Republicans call 'Obama's Katrina', says Rupert Cornwell
Premier League coaches join the RSC to swap the tricks of their trades

Darling, you were fabulous! But offside...

Premier League coaches are joining the RSC to learn acting skills, and in turn they will teach its actors to play football. Nick Clark finds out why
How to dress with authority: Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear

How to dress with authority

Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear
New book on Joy Division's Ian Curtis sheds new light on the life of the late singer

New book on Ian Curtis sheds fresh light on the life of the late singer

'Joy Division were making art... Ian was for real' says author Jon Savage
Sean Harris: A rare interview with British acting's secret weapon

Sean Harris: A rare interview with British acting's secret weapon

The Bafta-winner talks Hollywood, being branded a psycho, and how Barbra Streisand is his true inspiration
Tim Minchin, interview: The musician, comedian and world's favourite ginger is on scorching form

Tim Minchin interview

For a no-holds-barred comedian who is scathing about woolly thinking and oppressive religiosity, he is surprisingly gentle in person
Boris Johnson's boozing won't win the puritan vote

Boris's boozing won't win the puritan vote

Many of us Brits still disapprove of conspicuous consumption – it's the way we were raised, says DJ Taylor
Ash frontman Tim Wheeler reveals how he came to terms with his father's dementia

Tim Wheeler: Alzheimer's, memories and my dad

Wheeler's dad suffered from Alzheimer's for three years. When he died, there was only one way the Ash frontman knew how to respond: with a heartfelt solo album