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Only the best London offices thrive in emerging Covid divide

Rents on new prestigious offices rise, but decline for second-hand spaces

London

THE best new office buildings in London are commanding near record rents and prices during the pandemic; everything else, not so much.

The divide is unfolding as the slump in economic activity damps development, helping the most prestigious buildings achieve high rents and lure yield-hungry investors. At the same time, companies are dumping space they no longer need with workers still cocooned at home, which is weighing on values for anything but fresh buildings that boast top green credentials and first-class amenities.

The split can be seen from the City of London to the West End and beyond. Just last week, British Land Co sold its Clarges office and luxury-apartment development overlooking Green Park in upscale Mayfair, at a price more than 7 per cent above its valuation. Yet the landlord's overall office values declined by 3.1 per cent in the six months till September as vacancy rates rose across the city.

"With so much uncertainty, it is very natural to see a flight to quality and have investors flee to what they perceive to be the best new offices," Dror Poleg, author of Rethinking Real Estate, said. "Unfortunately, I don't think we know yet what the best is going to be post-pandemic."

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BP confirmed in a statement last Friday the sale of its headquarters in St James's Square to a company backed by Thomas Lau for £250 million (S$446 million), which the oil giant said was a record price for the area. Together with the Clarges sale, it is one of a handful of eye-catching deals in an otherwise grim year for London real estate investment.

Investors spent about £4.1 billion on London offices in the nine months till September - a drop of almost 45 per cent from a year earlier, said a report from broker Jones Lang LaSalle.

With Brexit looming, developers were already taking a cautious approach to new projects even before the outbreak. That means companies seeking large new offices will have little to choose from in the next few years, particularly the cutting-edge buildings that could help lure employees back to the city centre when the virus subsides.

This shortage of supply has helped spur a slew of big leasing deals by companies including Netflix and law firm Latham & Watkins. Financial advisory and asset management firm Lazard has revived its search for a new London headquarters after pausing it at the onset of the pandemic, Bloomberg reported.

Yet new leases overall were down 60 per cent in the first nine months of the year, said the Jones Lang LaSalle report. The average rent on the best new offices has risen by 12 per cent since the onset of the pandemic in March, while declining by 9 per cent for second-hand space, the broker's data show. This divergence is encouraging some developers to start new projects despite the gloomy economic outlook. BLOOMBERG

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