The Hanover Green West London offices debate

By Paul Norman – Co Star News – Monday, July 04, 2016 15:00

CoStar News Editor Paul Norman recently chaired the Hanover Green West London offices debate with some of the principal players discussing the trends and issues facing a market that has seen strong take-up and rental growth in its key centres.

The debate took place just before the EU Referendum vote. In attendance was: David Cuthbert, Kevin Hawthorn, Richard Zoers and Jonathan Webb of Hanover Green, Tony Lawson, founder of XLB Property, Tom Anderson, senior investment executive at Helical Bar, Tom Gaynor of Commercial Estates Group, Max Holliday, director real estate at communications giant WPP, and Andy Booth, asset manager at TH Real Estate.

CoStar: After a number of £50 per sq ft plus rents in Hammersmith and Chiswick recently it is clear that prices are pushing on in West London. How far have rents got to go in this cycle?

Richard Zoers: In terms of the tenant response it’s all relative basically with the rental story. When rents in West London were at £30 per sq ft it was always significantly less than the West End and you could argue that at £50 per sq ft it is still significantly less than the West End. But there is a limit to where occupiers who are genuinely West End tenants will move. It is more the core Hammersmith occupiers who agreed leases five years ago and are coming around to renewing and are saying “our rent was £35 a foot and all of a sudden the rents are £50 to £55 a foot, well what are our options?” I think the main thing is because the unemployment rate is so low and retaining good staff is getting harder this is a higher cost than the office in terms of occupational costs. Your staff costs have probably gone up more relatively than occupational costs so in the current point in the cycle people are more concerned about retaining the best staff and employees rather than the office costs.

“However we all know the market works in cycles and there will come a time when people are looking for value and some occupiers are looking at that and trying to future proof offices and look for the opportunities. If rents in Hammersmith and Chiswick are £55 per sq ft or even Richmond and Wimbledon then where are the other places where rents are less? In places like Ealing and Brentford with the transport links coming through there are options and it will be interesting to see how these markets perform moving forward.

Kevin Hawthorn: And do you think the impact of the upcoming rates revaluation will push occupiers from the West End out to Hammersmith Chiswick?

Max Holliday: “We are having to have a bit of a reality check at the moment because since the late 1990s we have had a relatively tenant friendly supply and demand situation and this whole uplift in costs has come in a short period of time. In the last three years rents have risen dramatically but it is only as rent reviews kick in or we begin to weigh up a move that it becomes reality. That is beginning to happen now. We are seeing some pretty high increases through market reviews and that is beginning to sink in at the moment across the group; the idea that this may not just be a bit of a one off.

“Going forward I think people haven’t got their head around the fact that if we want to stay in the same part of town we may have to accept we are no longer a £40 per sq ft occupier, we are now a £60 to £70 per sq ft occupier. For this reason I am not sure we have made our decision yet in terms of “is that going to be sufficiently high or hurtful to make us strategically look at moving out of central London or changing the structure of parts of the business?” To date one of our key criteria across the region has been that we need to be located in city centres, to ensure we can recruit and retain the best people. For this reason I think it will be a while before we strategically decide to move out of central London, but there may be individual situations where the rent rise causes so much pain that we have to do so.”

Kevin Hawthorn: “The rental costs remain a much smaller factor than staff costs.”

Richard Zoers: “It is a quantum thing. We have seen real rental growth on smaller suites but if someone is looking at sub 5,000 sq ft and the rent goes up £10 per sq ft it doesn’t make that much difference but if you are looking at 20, 30, 40,000 sq ft then it makes a much bigger difference on your rent costs when you add in your rates.”

Tom Anderson: “In London you have the pressure of a very limited amount of land, high residential values and a shortage of good quality offices so we are positive about the rental growth prospects. Occupiers purely driven by property costs may be pushed further out but I think rents are at a sustainable level. I just don’t see where the supply is coming from.

At The Shepherds Building we have recently regeared the lease with our largest occupier. They originally took a lease in 2001 at £25 per sq ft and have expanded in the building over time. The rent we agreed at renewal was basically double this, but throughout the term of their original lease, ie 15 years, their rent did not change. When we discuss renewal terms with occupiers that took space five years ago, the general reaction is ‘our rent is doubling’. Whilst this is broadly true everyone seems to overlook the fact that although there has been exponential growth in the last five years, broadly rents remained flat for the preceding 10 years.

Jonathan Webb: I think the resi story is quite interesting at the moment. There is undoubtedly change in terms of the demand and the pricing. We have moved back closer to the point where developers may question “ is it a no brainer to go for change of use to resi in certain markets as the rents for office are still strong and resi values are coming off a bit and you might find the balance change a bit again?”

Tom Gaynor: “There is still a limited number of sites. Once an office building goes to resi it’s not coming back. If you look at the Uxbridge Road in Ealing how many buildings down there have come out of the market? I think we need to see taller office buildings.”

CoStar: Do tenants pay a premium for higher floors in West London?

Richard Zoers: “We don’t see the rental differentiation that we see in the City and the West End on the highest floors but people do pay more for them. Interestingly on 12 Hammersmith Grove a broad rent for the middle of the building is being quoted and that varies up or down depending on whether it is top floor or lower. Generally occupiers would prefer everyone to be on one floor, as with the way fit out works, efficiency is so much better on an open floor. As an owner though building big open floorplates you have to think how many occupiers are out there who need them and how divisible are they?”

CoStar: How is demand holding up in the West London office market and where is it coming from?

Richard Zoers: The South East is a very difficult market as you cannot define it by stats. This first quarter, the Bayer and Thales deals at Green Park [in Reading] have swayed the whole of the Thames Valley to make it look better than it necessarily is and while I don’t think it is bad by any stretch of the imagination – I am relatively upbeat – but if you look at stats it is quite patchy. One big requirement can come along and that makes that part of town look better than it necessarily is. It is not like the West End or the City where you have a constant flow of requirements and therefore it is good to know what is going on on the ground and know which buildings are the best buildings, which have achieved the best rents and which haven’t achieved the best rents and understand the property micro story of the town.”

Andy Booth: “We are trying to distil that into occupiers who have moved from central core markets or even Clerkenwell. I guess Hammersmith on TMT is competing with Clerkenwell, Shoreditch and South Bank and it is just whether or not it is still at a discount to that.I mean if you get £70 per sq ft in Shoreditch or £60 per sq ft in Old Street and still at a discount are occupiers saying actually it is a bit too hot for us, we want to move West and be near Amazon and Google and create a cluster.”

Tom Anderson: “We have 300,000 sq ft in west London in Shepherds Bush, Hammersmith and Chiswick and currently we have less than 1,000 sq ft available. Most of the buildings are heavily multi let with a range of sized units available. A significant proportion of the units are less than 5,000 sqft and the demand is very very strong. We operate a flexible leasing structure allowing occupiers to expand and contract to suit their business needs so generally whenever a unit does comes back it is ‘prelet’ either to an existing occupier or someone on our waiting list.

“For us this is a consistent story across London. In all our buildings we try and create a buzzing environment and sense of community. We don’t try and be sector specific but what we do tend to find is we attract a number of likeminded and entrepreneurial businesses that like to be surrounded by other dynamic and fast growing entities. At The Shepherds Building for example we have a range of occupiers from various sectors including media, food, travel, fashion and even a soft toy creator. By operating a flexible leasing structure a number of these occupiers have started with a small office and quickly expanded within the building as their businesses have grown. It has worked phenomenally well. Our issue continues to be accommodating all of their expansion needs. A nice problem to have!

Richard Zoers: “If people don’t need to move they won’t.”

Tom Gaynor: “How many occupiers are actually downsizing because they are occupying more efficiently? So although the rent per sq ft is going up you are saving on rates, service charge, insurance, fit out on the area you are saving so the proportion of the increase in rent when you come to moving isn’t as great.”

Max Holliday: “That is true. However I am not sure the opportunities are as great as they are in other markets as in London people have got used to using space fairly efficiently and you won’t find many occupiers sitting there at 200 sq ft a head anymore.”

David Cuthbert: “It’s an interesting point because suburban London has been more generous in terms of the space allocation and then you move out to the Home Counties and it becomes more generous still. You have definitely seen occupancy increase. You have definitely seen Greater London occupancy increase putting more people into space reflecting a trend from central London. Companies are packing more people into the same area.”

Jonathan Webb: “ But that works in Greater London and perhaps the M25 zone but as soon as you get down to say Reading you generally find plenty of space and big desks still.”

Tom Gaynor: “All of our refurbs now are designed 1 to 8 and as new build 1 to 6 and we are seeing that in the buildings we are doing in Leeds and Bristol as well as London and the South East.”

Richard Zoers:“Is that from an occupational perspective or an investment perspective?”

Tom Gaynor: “The first bit is about being able to let it. You worry about the investment value once you have a tenant in it and even in for instance Bracknell where you have done a refurb one to 8 because most occupiers coming round Bracknell want the one to 8, five years ago they probably weren’t so bothered.”

Tony Lawson: “If we can accommodate it we will do between 1 to 8 and 1 to 10 and it crops up on most lettings I have got and if you can cram more people in it is more cost effective. Interestingly in Glasgow 1 to 6 is the norm because it is backroom – it is large floorplates, 20,000 sq ft and they are squeezing people in up there.”

CoStar: Will traditional occupiers such as the fashion industry stay put in the face of high rents?

Tony Lawson: “It is the staff that is important. Occupiers like to create an environment for staff and you go too far out you don’t have that, so it will depend what is on their doorstep.”

Tom Gaynor: How far out do they have to go now? If you are paying £50 per sq ft in Ealing or Shepherds Bush are you really going to move and risk all of your staff?

Tony Lawson: “It’s not just rent. If someone is used to being able to walk out the door and have 20 cafes on the doorstep and have breakout space and the kind of environment you have at Shepherds Bush that is what they want. It does not matter what the rent is if you go to Maidenhead they won’t be able to find it.”

Jonathan Webb: “Actually the Maersk move to Maidenhead is an interesting one because it is very much a central London move to a location which is completely different. You could understand them going to Reading because it has a city centre and plenty of amenities and communications but Maidenhead is quite different to the City.”

Tony Lawson: “The amenities has been key to Time Inc going to Farnborough.”

Andy Booth: “Crossrail makes the difference – it will have a huge influence.”

David Cuthbert: “We did a letting that was as close as a West End feel outside of central London in Richmond – bars, rivers and shops nearby – to a hedge fund chief exec who wanted to move out there because he lived locally. They spent £1m on fit out and then turned tail and moved back to the West End because the staff just said they wanted to go back.”

Tom Gaynor: “There must come a point with occupiers where rents are so high there is just a flight to quality where you think if I am going to pay £60 a foot in Hammersmith then I might as well pay another £20 per sq ft to be exactly where I want in the environment that is perfect for my business.”

Kevin Hawthorn: “With regards to retailers Not on the High St were in Richmond and stayed in Richmond, Boden in Acton stayed in Acton, Monsoon will stay close as well as Pret A Porter.”

Richard Zoers: “I would like to see the stats on how many times it is the senior staff who decided. You can make as much of a financial argument as you want in terms of the costs of moving but then it is the senior people in the business that make the decision particularly to stay close to where they live.”

Tom Anderson: “The housing issue has to be one of the biggest for London because the costs are pushing employees further and further out, which is pulling employers back into the centre. Londoners spend more time commuting than anyone else in the country but it’s got to the point where they are dictating where they want to work to mitigate this and employers are having to listen inorder to retain talent.

CoStar: How does west London compete with east London for the TMT sector?

Tom Anderson: “I think one thing that East of London did have on its side compared to the West was cost. However this is no longer the case with the rents that are being achieved in Clerkenwell/Shoreditch etc. Ultimately the employees of these businesses want to be in interesting areas where they can work and play and are very unlikely to move into the traditional core locations. We are seeing the East/West fringe market is becoming much more open.”

David Cuthbert: “The days where you had a City team and a West End or out of town team is less so and it is all morphing in together with London seen as one lump and that includes most of Greater London. Boroughs and occupiers will think London wide. It used to be insurers wanted to be right by Lloyds but they do not have to be now.”

Richard Zoers: “That is reflected in the agency market as well.”

Tony Lawson: “Is the biggest victim of that success the Thames Valley? If you are a young tech company now you don’t want to be out there as you can’t get the staff.”

Jonathan Webb: “Look at Amazon even, they are leaving Slough. The small tech companies are more focused around London and maybe even the bigger TMT players want to be there too. You do still have the telecoms giants in the Thames Valley, Cisco, Vodafone, O2 for example.”

Richard Zoers: “If you look at staff if the majority of important staff are under 30 they want to be in central London and if they are over 30 the majority want to move out. The split on living costs as a graduate between central London and Manchester or Reading you would have to look at it and what you can get for your money and what the job is then I am going to have to think about it.”

Max Holliday: “Our people are still massively location sensitive. I cannot imagine that any of our companies would go in to the City – City fringe perhaps. I know some Tech companies have moved to the city but then the TMT term is much too general, I don’t see that Amazon and Cisco are the same type of company as WPP at all.

“Establishment costs are important but are not the be all and end all. If we average say 6.5% of revenue as establishments costs and if it goes to 8% it is a big increase but rent would have to go up a lot to go there. But even that alone may not be sufficient to drive staff to locations that are much further afield. If for example you move from the West End to Maidenhead you are probably going to save 30% of your staff costs but our companies are not making that decision and that is probably much more of an influence then saving £20 a foot on the rent so there is a lot more to it than property costs. ”

What are the key infrastructure and transport initiatives for West London offices?

David Cuthbert: “The Elizabeth Line will be a real game changer for the journey time. To Bond St it is 10 minutes to Ealing compared to 25 minutes to Hammersmith on the tube.”

Jonathan Webb: “Ealing becomes much more of an opportunity but the supply of high quality stock is not coming through.”

Richard Zoers: “Those rents will drag up the secondary rents.”

Jonathan Webb: “I think with Crossrail, Ealing is the first beneficiary and then you will go out from there, maybe it’s a Hayes, that’s the next obvious stop, albeit there is limited supply there so perhaps a Slough will pick up the baton as there is supply coming through.”

Tom Anderson: The infrastructure and transport links are absolutely vital and the Overground being brought under TfL control has made a huge difference to fringe London. For example you can get from Clapham to Whitechapel in half an hour so the overground completely opens up different parts of London. I think Crossrail and HS2 will be good for West London generally because of the Old Oak Common interchange and the corridor of investment & development that this opens up all the way down to White City.”

Are you looking to buy development land there?

Tom Anderson: “Pure development is becoming harder and harder with planning risk, build costs and levies. It is very difficult to find value so we are invariably looking for opportunities where we can work with existing buildings ie go up, out, build on part etc. This is exactly what we did at The Bower at Old Street. In creating a brand and community it helps if the buildings have some inherent character and original features.

 

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