British Land weighs new office projects as London demand soars

THE amount of office space in the City of London under offer to lease is at its highest in almost a quarter of a century, prompting developer British Land to weigh bringing forward new projects to capture booming demand. 

The landlord has already committed to building a new skyscraper at its Broadgate campus, and is now exploring options for other projects it could kick-start, including 1 Appold Street, a building previously occupied by Deutsche Bank, chief executive officer Simon Carter said in an interview on Wednesday (May 22). 

The company rented 3.3 million square feet of space across all its properties in the year, at rents that were 15.1 per cent higher than its valuers expected, according to an earnings statement. It signed another 316,000 sq ft of space at its office-led campuses since the year’s end, and has a further 544,000 sq ft under offer.

Still, rising rents have not been enough to fully offset the impact of higher interest rates.

British Land wrote down the value of its office portfolio by £490 million (S$840.6 million) last year, as sticky inflation caused values to slip further in the second half, albeit at a slower rate.

UK consumer price inflation slowed further, according to data released on Wednesday, but remained at a higher rate than economists expected, pushing the FTSE 350 Reit Index lower. 

British Land marked down the value of its overall portfolio by 2.6 per cent in the year through March, with its office-focused central London campuses registering a 4.9 per cent decline, according to the statement.

Overall, the company’s portfolio, which also includes retail parks and urban warehouse properties as well as a vast development project in London’s Canada Water district, fell to £8.7 billion from £8.9 billion a year earlier. 

Commercial real estate values have been particularly sensitive to higher interest rates, as buyers demand better returns to justify the risk of investing in illiquid assets at a time when bond yields are elevated.

SEE ALSO

London's Canary Wharf sees £1.2b slashed from property values

Higher rates have accentuated the impact of shifting working patterns and growing environmental regulation that were already hurting the valuations of older offices, as investors grow bearish on the prospects for future demand. 

But, the picture for the best new space is in stark contrast.

Vacancies on newly built central London offices stood at just 1 per cent at the end of the first quarter, compared with 11.1 per cent of second-hand office space that is empty, according to data compiled by broker CBRE and used in British Land’s earnings presentation.

Space under offer to rent in the City of London market is the highest since 2000, and is 54 per cent higher than the 10-year average, the broker’s data showed. 

The dearth of new construction of high-quality green buildings that can help companies lure their staff back to the office has created competition between tenants for the best buildings.

Among deals signed by British Land since the year’s end include a pre-let to hedge fund group Citadel, which has prompted the landlord to commit to building a new skyscraper, at 2 Finsbury Avenue, on a plot that previously housed a building rented by UBS Group. 

“(Rental) growth accelerated to 5.9 per cent, exceeding our guidance in all sectors,” Carter said in the statement. Despite geopolitical and economic uncertainty, the company now expects rents to rise as much as 5 per cent next year. 

The company could bring in partners for some future projects as a way to accelerate developments, he said in an interview.

“There is a real imbalance between supply and demand in the core markets,” Carter said. “There is 13 million sq ft of active demand across central London; a lot of that is from financial services. In the City, in particular, there is only 1.3 million sq ft of new supply going to come through.” BLOOMBERG