Looking for London. The hunt for value in the capital s commercial property market

Transcription

1 Looking for London The hunt for value in the capital s commercial property market

2 In this report p4 Foreword p6 Research summary p8 London 2 Looking for London The hunt for value in the capital s commercial property market

3 rents p10 Cluster effect p12 Appendix Looking for London The hunt for value in the capital s commercial property market 3

4 Foreword By Russell Gardner Head of Real Estate, Hospitality and Construction, UK&I Ernst & Young LLP UK London s landscape has long been categorised by the clusters of industries that reside there like-minded businesses that benefit from positioning themselves alongside each other in order to thrive and grow. 4 Looking for London The hunt for value in the capital s commercial property market

5 Yet, as our research into commercial property rents over a five-year period shows, this traditional picture of the capital is changing. Rents are on an inexorable rise and that is having a dramatic effect on the way the city is made up, shifting these clusters across London and providing new hubs of expertise. Our report shows that between 2010 and 2015, commercial property rents in the capital rose by an average of 70%, with four areas of the capital experiencing rises of more than 100%.* As a result of these rises, businesses are looking to areas they would not have once considered as they search for the best value office space, particularly in the east. Elsewhere, some areas of London are looking more varied than ever before, as organisations search for the spaces that best suit their needs and their spending power. Hubs of the future? We believe it s likely that those areas with the cheapest rents could become boom areas in the near future. The Docklands one of the last spots of true value in central London according to the data could be one of the next business hubs, along with the Southbank, where lower rents were also recorded by our research, and areas in the east of the city. This will have the effect of closing the gap between the eastern fringes of the city and the western fringes of Docklands, resulting in areas that are unrecognisable in 10 years time. A rise in residential space in areas traditionally classified as commercial is also having an impact on the landscape of London, with the lack of space in some places pushing out businesses from their traditional heartland. Take the Strand, for example, where new residential buildings are replacing large commercial units. The effect from this is being felt in locations like Kings Cross, which has become a popular location for businesses priced out of more central commercial areas that have become prime residential hotspots. Catalyst for change Once peripheral areas like Elephant and Castle could act as bridgeheads for even more development, this time south of the river. With its residential apartments and revamped shopping centre, the areas around Elephant and Castle should provide a compelling proposition for both residential and commercial development, effectively offering zone three pricing in zone one. This could potentially see the Southbank redevelopment moving further away from the river and deeper into places employers may not have considered previously, but which are surprisingly close to central London. Are you being served? EY s research also shows the continuing growth in popularity of serviced offices. Previously, new serviced offices tended to be focused on Docklands, Holborn and Southbank, but our research shows an increase in serviced office transactions across all parts of London in 2015, particularly in Farringdon and Shoreditch. The office of the future will look very different, and that raises questions about whether employers will still feel the need to fund 500,000 sq ft buildings that they rent for 25 years, or whether they will be looking for somewhere more creative and flexible to house their workforce. Further afield, interest is expected to increase in M25 towns, such as Croydon, Watford and Uxbridge. Moving out of central London as part of a pitch to potential employees is an approach some of the banks are taking, and rents are already rising to reflect this. Likewise, we expect The Elizabeth Line to be a game changer, allowing people to move more quickly across London with the result that businesses can locate themselves in places they would not have traditionally considered. The average length remaining on a 25-year lease is around 10 years, and many bigger employers will already be thinking about where they go at the end of that, with one eye on the Crossrail effect. * All statistics referenced in this report are based on our own research. Please see appendix for methodology. Looking for London The hunt for value in the capital s commercial property market 5

6 Research summary Average office rent 2015 (all areas) psf Highest recorded rent psf (more than doubled since 2010) Commercial rent rises Changing the face of London Commercial property rents in London have risen by an average Average rent increase 70% in the last five years Highest average rent 2015 per square foot Mayfair nd St James s st Belgravia/ Knightsbridge rd psf psf 2015 Good value harder to find Cheapest average rent in London (psf) Last spot of true value? Future boom area Docklands Southbank Aldgate Euston/Kings Cross Clerkenwell Docklands Highest rent psf Average rent psf All amounts in pounds unless otherwise noted 6 Looking for London The hunt for value in the capital s commercial property market

7 Average rent (psf) St James s Mayfair Belgravia/Knightsbridge Covent Garden Fitzrovia Victoria Soho Paddington Holborn Bloomsbury Farringdon Clerkenwell Euston/Kings Cross Aldgate Southbank Docklands Lowest percentage growth of average rent Highest percentage growth of average rent Aldgate 42% growth Shoreditch 181% growth Looking for London The hunt for value in the capital s commercial property market 7

8 London rents Percentage growth in average rent between Paddington 54% Knightsbridge 56% Holborn 78% Fitzrovia 70% Marylebone 56% Bloomsbury 87% Mayfair 52% Euston/ Kings Cross 48% St James s 108% Victoria 47% Covent Garden 70% Shoreditch 181% Clerkenwell 119% Southbank 79% Farringdon 124% Aldgate 42% Docklands 50% 8 Looking for London The hunt for value in the capital s commercial property market

9 London rents Average rent in 2015 (psf) Marylebone Paddington Bloomsbury Knightsbridge Holborn Fitzrovia Mayfair St James s Euston/ Kings Cross Covent Garden Clerkenwell Southbank Shoreditch Farringdon Aldgate Victoria Docklands Looking for London The hunt for value in the capital s commercial property market 9

10 Cluster effect Our research reveals a London landscape that is changing. Zones once characterised by the cluster of businesses based there are increasingly taking on new identities, a change driven by commercial rental costs. Could this result in a hollowing-out of London, as larger employers move out of the centre to places they would have previously regarded as peripheral? Businesses are searching for the best value for money regardless of whether an area has been their traditional heartland. Technology, media & telecommunications (TMT) Creative businesses are basing themselves in the heart of London, an area previously dominated by banks and insurers; financial businesses are moving to the West End; and large technology companies are clustering around Kings Cross, which saw the TMT sector taking up 52.47% of all new square footage leased in Clerkenwell, too, has seen a significant increase in TMT deals (44.3% of take-up in 2015) as the sector has moved away from areas such as the Southbank, which saw reduced interest from the sector with take-up of just 7.44% in Education/public sector At the same time, the education/public sector is moving closer to central London, taking-up 55.52% of new square footage leased in Covent Garden last year. Bloomsbury saw similar interest, with the sector making up 13.33% of square footage leased in 2015, as those businesses move away from places, including Farringdon, Holborn and Docklands. Professional services The services sector has seen a considerable shift in the last five years, departing from the likes of Covent Garden (66.52% of take-up in 2010 to 17.97% in 2015), Euston/ Kings Cross (40.54% in 2010 to zero last year) and Belgravia/Knightsbridge (73.50% in 2010 down to 40.03% in 2015). Instead, this sector has repositioned itself in Victoria (70.68% analysed of new square footage in 2015), St James s (76%) and Southbank (29.30%). Retail Belgravia/Knightsbridge has experienced increased interest from retailers, which made up just over a third of square footage leased in 2015 (33.93%). Clerkenwell (14.08% in 2015) and Holborn (6.66% in 2015) also saw interest from this sector last year. In tandem with this, retail transactions have decreased notably in Farringdon, Kings Cross and Marylebone. Serviced offices The trend for serviced offices has been experienced in many areas of the capital, particularly in Farringdon where it made up 52.18%of new square footage leased in 2015, closely followed by Shoreditch (42.72% take-up), Paddington (32.58%) and Aldgate (20.8%). Energy Energy companies have also been noticeable in their move to the Southbank, which had a 39.66% take-up of new square footage in 2015, compared with zero interest in Clustering will continue to occur where the rents are lowest, with the next wave of new businesses ending up in the cheapest accommodation they can find. These tenants will come and go as their businesses grow, rather than creating a new map of sector-based areas that evolve only slowly, as was the norm during the last century. 10 Looking for London The hunt for value in the capital s commercial property market

11 Sectors with the highest increase in percentage of square footage leased between 2010 and 2015 Paddington % Marylebone +8.28% Bloomsbury % Knightsbridge % Holborn % Fitzrovia +5.24% Mayfair +8.77% St James % Euston/ Kings Cross +33.2% Clerkenwell % Covent Garden % Southbank % Shoreditch % Farringdon % Aldgate % Victoria % Docklands % TMT Serviced offices Education/public sector Energy Professional services Retail Looking for London The hunt for value in the capital s commercial property market 11

12 Appendix Methodology Our research looked at real estate transactions to London businesses in the years 2010 and 2015 across specified London regions and sectors. EY analysed the database provided by commercial property information specialist CoStar, which tracks over 400,000 UK commercial property buildings. The database has been used to collate every office letting in each of the London villages for the years 2010 and The highest rent and average rent have then been calculated from these transactions. For each transaction, EY also assigned an occupier type to assess the levels of take-up for each sector. The full list of regions analysed is: Paddington Belgravia/Knightsbridge Marylebone Mayfair Victoria St James s Fitzrovia Southbank Soho Bloomsbury Covent Garden Euston/Kings Cross Holborn Farringdon Clerkenwell Shoreditch Aldgate Docklands The sectors observed included: Retail TMT Charities Serviced offices Education/public sector Energy Hotels Services Other 12 Looking for London The hunt for value in the capital s commercial property market

13 Percentage growth in average and highest rents between 2010 and 2015 % change -50% 0% 50% 100% 150% 200% Paddington Knightsbridge Marylebone Mayfair -10.7% 23.3% 18.8% 21.1% 54.0% 56.0% 55.5% 51.6% Victoria 46.5% 46.8% Area of London (west to east) St James's Fitzrovia Southbank Soho Bloomsbury Covent Garden Euston/Kings Cross Holborn Farringdon 13.9% 117.6% 108.3% 52.5% 70.2% 66.2% 78.6% 51.2% 48.9% 73.0% 87.0% 44.5% 70.0% 75.7% 47.5% 77.8% 101.4% 124.3% Clerkenwell Shoreditch Aldgate Docklands 14.5% 55.7% 42.4% 49.8% 120.0% 119.4% 126.4% 181.0% Percentage growth in highest rent Percentage growth in average rent Source: EY Looking for London The hunt for value in the capital s commercial property market 13

14 Sec Appendix Percentage-point difference in new square footage take-up for sectors researched between 2010 and 2015 Services Hotels Retail TMT Paddington Knightsbridge Marylebone Mayfair Victoria Area of London (west to east) St James's Fitzrovia Southbank Soho Bloomsbury Covent Garden Euston/Kings Cross Holborn Farringdon Clerkenwell Shoreditch Aldgate Docklands Source: EY 14 Looking for London The hunt for value in the capital s commercial property market

15 tor Charities Serviced offices Education/ public sector Energy Other Looking for London The hunt for value in the capital s commercial property market 15

16 Key contacts Russell Gardner Head of Real Estate, Hospitality and Construction (RHC), and RHC Tax Leader, UK&I Ernst & Young LLP UK +44 (0) Peter McIver Head of RHC Assurance, UK&I Ernst & Young LLP UK +44 (0) Fraser Greenshields Head of RHC Transaction Advisory Services, UK&I Ernst & Young LLP UK +44 (0) Mark Wesley Head of RHC Advisory, UK&I Ernst & Young LLP UK +44 (0) EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. About EY s Global Real Estate Sector Today s real estate sector must adopt new approaches to address regulatory requirements and financial risks while meeting the challenges of expanding globally and achieving sustainable growth. EY s Global Real Estate Sector brings together a worldwide team of professionals to help you succeed a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Sector team works to anticipate market trends, identify their implications and develop points of view on relevant sector issues. Ultimately, this team enables us to help you meet your goals and compete more effectively EYGM Limited. All Rights Reserved. EYG No GBL indd (UK) 04/16. Artwork by Creative Services Group Design. ED None In line with EY s commitment to minimize its impact on the environment, this document has been printed on paper with a high recycled content. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com/realestate