London’s Potential £12billion Office
Development Boom at Risk of not being delivered by 2016, EC Harris
Reports
21 February 2012
- Over 150 projects lined up which could deliver a potential 53
million square foot of gross office floor area by 2016
- However 50% of the pipeline is at risk of not being delivered
by 2016 due to lack of funding and pre-lets
A new report out today from EC Harris, the global built asset
consultancy, reveals that the size of the London office development
pipeline is unprecedented, with over 150 potential projects ready
to deliver 53 million square feet of gross internal office floor
space by 2016. However; the report warns that many of the
developments are in a precarious position with projects struggling
to attract pre-let tenants and external funding which could see 50%
never even reaching the construction site.
Where and what is the ‘notional’
pipeline
The report, entitled “London Office
Development: The Challenge Ahead” confirms that the City of London
remains the centre of attention for developers and investors alike,
with over 60% of the total area (34m square foot gross internal
area) and over 50% of the number of potential projects located
there. The average size of a City project is circa 420,000
square foot gross, nearly twice the size of those planned for the
West End or Midtown, reflecting the large scale tower schemes that
are planned or under construction such as 20 Fenchurch Street and
the Leadenhall Building.
Midtown is characterised by smaller projects, with over 30
potential developments totalling 7 million square foot gross
internal area on the pipeline. In comparison, the West End
pipeline is relatively restrained reflecting the greater planning
challenges. Nevertheless there are still 25 potential
developments that could commence pre-construction or start on site
over the next 4-5 years. The average development size in the
West End is 240,000 square foot gross.
Richard Taylor, Head of Commercial Development at EC Harris and
author of the report said: “On paper, the development pipeline for
London offices shows massive potential and investment.
However, in reality the market is very different, with a large
number of these projects unlikely to be delivered as they struggle
to find pre-lets and external funding. To stand a chance for
success, projects need to differentiate and create a significant
market advantage if they are to maximise their chances of
completion.”
Drivers for the pipeline and risks to
delivery
The growth of this pipeline is directly
driven by the reported 25-70 million square foot office space
leases that are expected to expire before 2017. However, the
report identifies the euro crisis, diminishing tenant optimism and
ever tighter funding markets, as key reasons for these tenants to
potentially stay, ride the storm or extend existing leases leaving
developments that need a significant “pre-let” waiting.
This means that, in order to succeed, projects need to be even more
focused on differentiation and creating a significant market
advantage to maximise the opportunity for success.
Low level of refurbishment space
One of
the additional findings of the report was that there is only a
relatively low level of refurbishment space planned or in
construction, with only 15% of the pipeline by area classed as
refurbishment space. Midtown had the most refurbishment space
as a proportion, at over 2.5m square foot gross, with only 12% of
the pipeline in the City identified as refurbishment.
Improving chances for success
The report
recommends that investors and developers address this challenging
and competitive market by:
- End user alignment: Ensuring that projects are forward
thinking and have the end user in mind, offering financial
confidence about cash flow implications, flexibility to
expand/contract in a volatile market, specifications that reflect
the nature of the tenant’s business, high levels of sustainability
and absolute certainty of delivery.
- Funding alignment: It is a buyers’ market and funders are
looking for optimum value creation, a long term approach that
delivers a sustainable asset and total certainty about planning,
costs, and delivery. JV partnerships are also attractive as
the greater the risk share the greater the chance of funding.
- Commercial advantage: developers and investors must focus
on creating and delivering a competitive asset to create value for
their tenants through maximising design efficiencies, achieving an
optimum cost solution that takes into account the whole life cycle
of the asset and a cash flow optimisation that avoids early upfront
costs.
- Finally the report points out the need to move fast as the more
advanced the development the more certainty it will offer potential
investors and tenants who will shortly be spoilt for
choice.
To download a copy of the report, click
here.
- ends -
About the research – methodology
The
research was carried out in November 2011 and is based on a
snapshot analysis of commercial office development projects
currently being planned for delivery in Central London through to
2020.
It uses an estimation of development programme, total unit
numbers, independent reports in the public domain, saleable area
and sales values to assess the total number and area expected to be
delivered per annum in this market segment for the next 8 years. It
is not an exhaustive analysis of all schemes in the public domain
but illustrates the clear profile of the future development
pipeline.
For further information contact:
Andy Rowlands
Group PR Manager, EC Harris
andy.rowlands@echarris.com
T: +44 (0) 20 7833 6662
M: +44 (0) 7810 850 476
Simon Pugh
Account Director, Weber Shandwick
+ 44 (0)20 7067 0320 / +44 (0)7762 657 280
spugh@webershandwick.com
About EC Harris
EC Harris is a leading
global built asset consultancy. As an ARCADIS company, we have
approximately 19,000 professionals worldwide operating in over 70
countries, 300 offices and generating in excess of €2.3 billion in
revenue. Working across a wide range of market sectors, we help our
clients make the most from the money they spend on their built
assets. For more information visit www.echarris.com