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The resilience of the London property market Why London provides attractive opportunities for Commercial Property Investment

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The resilience of the London 

property market – Why London 

provides attractive opportunities 

for Commercial Property 

Investment 

Anthony Epenetos – The Lorenz Consultancy

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The Lorenz Consultancy

• Commercial property consultancy based in  Mayfair focused on all aspects of commercial  property • Agency investment, agency leasehold  acquisition and disposal, rent reviews, lease  renewals, break clauses, dilapidations,  valuation and litigation

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What we have seen‐

Prime Rent:

Prime rental levels in the West End for grade  A office space:

– Sept 2007: £110 per sq ft

– Sept 2008: Lehman recession prime rents dropped 

to £80 per sq ft – 23 Savile Row – Sept 2009: £85 per sq ft

– 2010: £95 per sq ft – 2011: £100 per sq ft

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Tenant’s incentives: rent free 

contributions

• In a weaker market rent free periods increase  to incentivise tenants to take space • In West End tenant incentives are the lowest  from any London market: – 2008/9 circa 2 months per year term certain – 2011 circa 1 month per year term certain – 2012 less than 1 month per year term certain

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Lease terms

10‐15 year leases used to be the norm – 2009: 3‐5 year lease terms – 2012: 10 year leases looming back again • From an investment perspective a break  option negatively affects investment value for  Landlords – 5 year break options can be mutual give Landlord  flexibility too

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Development decreases

• Development pipeline decreases during  uncertain times • Strong demand for offices creates lack of  supply: • 38 Hans Crescent in Knightsbridge let to one  tenant on c.30,000 sq ft at £54 per sq ft since  no other competing buildings on the market.

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Example: 38 Hans Crescent, SW1

32,000 sq ft in total over  1st ‐5th floorsBarclays had a lease until Nov 2019Second hand grade A spaceLet to one occupier before full  marketing campaign startedRent of £54.00 per sq ft achieved

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Office supply

Office to Residential conversions have taken  700,000 sq ft in the West End alone.  • Planning rules have been relaxed to allow  residential conversions more easily • Investors may buy a commercial property for  investment and asset management value with  residential conversion being the “icing on the  cake”

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Where is demand coming from?

• Demand from UK and overseas occupiers for  London offices • UK mature market funds and international  investors for Commercial property – 70% of  investment from private and overseas  investor • Safe haven for secure investment and a  business base for occupiers

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Occupational costs

• Historically occupational costs for commercial  premises have been higher • Office occupancy costs to businesses of only  13% of total business costs – only 10‐15 years  ago office costs were 20‐25% of business costs • Rents are rising but office space is still  relatively cheap

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Leases unique to the UK

• 10‐15 year leases not uncommon • Leases can be inside or outside the 1954 Act – Rights to renewal at expiry • Lease renewals subject to a market rent  – protect investment value • Rent reviews every 5 years standard  – protect investment value • Landlords do not have to offer renewals if they  plan a substantial refurbishment or  redevelopment of a property

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Capital values

• A strong occupational market results in lower yields on  investment values so capital values increase • Investment transaction volumes decreased during the  recession having the affect of increasing capital values  since demand for commercial acquisitions remained  high – property seen as a safe investment • UK investment market a relatively closed market – lots  of deals off market thus investors need to be properly  advised

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Investment market experience

• Most central London Commercial property  investments on the market have multiple  bidders.  • Achieved values going for above quoting  terms – we are seeing the market rising

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Example – 16 Bowling Green Lane, EC1

– 8,188 sq ft of  offices quoting  oieo £2.4m – Under offer in a  week at 20%  above guide  price

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Landlord/Investor/Occupier

• Freehold investment acquisition • Freehold investment disposal • Landlord asset management – lettings • Tenant leasehold acquisition • Landlord/Tenant rent review, lease renewal  and dilapidations settlement www.thelorenzconsultancy.co.uk

References

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