London office developments ‘at risk from eurozone crisis’
Schemes are due to deliver 53m sq ft of office space in London by 2016 but a loss of confidence among tenants and problems securing funding are hampering some projects
A property consultancy has warned that more office developments could stall in the City of London as the eurozone debt crisis affects tenant demand and funding.
A report from EC Harris shows that the “notional” London office development pipeline contains 150 potential projects ready to deliver 53m square feet of office space by 2016, with a construction value of £12bn. However, difficulty securing pre-let tenants and external funding means that many may not come to fruition.
The City accounts for more than 60% of the total area (34m sq ft) and more than half the number of projects. The average size of a City project is 420,000 sq ft, nearly twice the size of those planned for the west end.
These projects are driven by a growing shortage of high-quality office space, with leases covering up to 70m sq ft to expire before 2017 in London. However, the eurozone crisis, diminishing tenant confidence and tighter funding markets are key reasons for tenants to stay and ride out the storm. Some are opting for refurbished space, rather than newly built offices.
Royal Bank of Scotland downscaled its investment bank with 3,500 job cuts last month – equivalent to 500,000 sq ft of office space. Property finance is also becoming scarcer as some banks such as Société Générale have pulled out of risky lending.
“What the crisis has done is put doubt in people’s minds,” Richard Taylor, head of commercial development at EC Harris and author of the report, told the Guardian. “Tenants are getting nervous – from media to solicitors – about pre-lets.”
Developer Hammerson suffered a blow last month when law firm CMS Cameron McKenna pulled out of a partial pre-let at Principal Place in the City. At about the same time, work on the £800m Pinnacle tower on Bishopsgate stalled again. Funding from a group of lenders including HSBC hinges on the developer, Arab Investments, pre-letting a large chunk of the planned 63-storey building.
Timing is crucial, said Simon Rawlinson, head of research at EC Harris. Land Securities and British Land, two of Britain’s largest property developers, look to have timed the completion of their new skyscrapers right – both the Walkie Talkie and the Cheesegrater, designed by Rafael Viñoly and Rogers Stirk Harbour + Partners respectively, are due to open in 2014 when most City office leases expire. By contrast, the nearby Heron Tower, which was completed last year, is “slightly early in the market and possibly a harder market sell than when you deliver in 2014/15,” said Rawlinson.
The advantage of office towers is that they tend to be occupied by several tenants, and are not reliant on one big pre-let. British Land has already signed up insurance broker AON for the lower floors of the Cheesegrater in Leadenhall Street. Land Securities is building the Walkie Talkie in Fenchurch Street in partnership with Canary Wharf Group, and both have strong client bases. Meanwhile, the Renzo Piano-designed Shard at London Bridge is backed by Qatari Diar, which has deep pockets.
“Tenants don’t want to commit two or three years in advance,” said Rawlinson. “Developers that don’t have a joint venture partner, are dependent on a pre-let or without alternative sources of funding will struggle most to get projects across the line.”