The resilience of the London
property market – Why London
provides attractive opportunities
for Commercial Property
Investment
Anthony Epenetos –
The Lorenz Consultancy
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
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
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
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
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.
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”
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
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
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
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
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
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
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