It is not the level of demand that has underpinned the values but a combination of a few wealthy occupiers with high demands combined with a shortage of high-quality Grade A/newly developed space in the prime areas of the West End. It is these factors that have led to rental growth.
Recent statistics demonstrate this:
• Fair demand in early 2011 and a lack of development have caused the supply chain to be some 20% below the 10-year average.
• Some 2.6 million sq ft was let in the West End over the last 12 months including 530,000 let in the third quarter. There are only 30 new office schemes in the development pipeline for 2012/2013 which account for 2.5 million sq ft.
• Whilst the vacancy rate for the West End area overall (including under construction) is 6.5% (see Fig. 1) the actual amount of completed space ready now is under 4% of total stock.
When choosing a floor the ‘wow factor’ helps secure a tenant. It could be a stunning entrance, an amazing view or possibly outdoor space, etc. But on a more serious note a typical hedgefund will have an extensive shopping list of amenities, which many converted buildings cannot fulfil, hence the need for state-of-the-art new buildings, which have been more commonplace in the City of London. These typical amenities might include:
• Fully accessible raised flooring
• Metal tiled suspended ceiling
• Bike rack and shower facilities
• Full air conditioning
• High quality reception and common parts
• Demised WCs on each floor and kitchenettes
• Category 5e cabling and LG7 lighting
• Back-up generator or UPS facilities
• 24-hour security
• Easy to use rectangular floor plates
Some of the smaller financial occupiers are attracted to buildings where a self-contained whole floor is 5,000 sq ft or less. Typically, such a development is considered relatively large in the West End as opposed to the City where floor plates are traditionally larger. This demand further exacerbates the supply shortage of suitable space.
The need for a prestigious address in the West End has meant that the prime areas such as Mayfair and St. James’s have been the most sought-after locations. With listed issues, the value of land and the complicated planning mix required, there have been very few completely new self-contained office buildings developed in the past five years.
Some examples include:
• 23 Savile Row W1 – 100,000 sq ft
• 15 Sackville Street W1 – 34,200 sq ft
• 44 Dover Street W1- 36,000 sq ft
• 1 Grafton Street W1 – 37,500 sq ft
• 14 St George Street W1- 51,000 sq ft
• 77 Grosvenor Street W1 – 57,500 sq ft
• 50 New Bond Street W1 – 33,920 sq ft
• 40 Bruton Street W1 – 22,950 sq ft
• 33 Jermyn Street SW1 – 62,380 sq ft
• 17 Duke of York Street SW1 – 11,700 sq ft
It is these types of buildings with sought-after addresses that can command the highest prices per square foot. And it is thus these landlords that are continuing to hold out for record ‘headline’ prices.
The shortage of supply has forced the financial sector to look outside the more traditional areas of Mayfair and St James’s into neighbouring areas, such as north of Oxford Street and unusual places like Soho where relatively high figures have been offered for the right style of space. One hedge fund is rumoured to be acquiring the top floor at the new scheme 24/27 Great Pulteney Street in deepest Soho at a rent close to £90 per sq ft. Other relevant lettings in the West End show the healthy prices being paid (see Table 1).
Traditionally where the vacancy rate had been below 4% this has been a trigger for rental growth and current supply/demand statistics show that this will continue for the foreseeable future.
Paul Brewster is Partner with Brewster Leech, the property surveyor and consultancy. Brewster Leech have helped occupiers such as General Atlantic, Franklin Templeton, Ignis, Armajaro, PVE Capital, Finisterre and Blue Bay with specific office needs.