With 2015 likely to deliver one of the lowest volumes of new office space to the London market for twenty years, developers brave enough to embark on schemes three or four years ago are now reaping the rewards.
Today occupier demand easily outstrips supply and rental growth is forecast to continue, but back in 2010 it was a very different picture. Then, the office market was in the doldrums and very few developers had the confidence – or the necessary finance -to commence speculative developments.
One developer with the foresight and means to look ahead was Land Securities. In 2010 they announced the speculative development of a 690,000 sq ft City office tower at 20 Fenchurch Street.
Given the severity of the recession and the widespread pessimism about the pace of recovery, it may have appeared to be a risky venture. But, along with the risk, there are benefits for those prepared to commit to early cycle development.
Due to the economic situation, material and construction costs were relatively low and Land Securities was able to market the building – popularly known as the Walkie-Talkie – with little competition.
Subsequently, the office tower has become a huge success story, with demand enabling Land Securities to secure a weighted average lease term to first break of 17 years and average rents of £64 per sq ft.
As a result the company expects the scheme to deliver a valuation surplus of over 60 per cent – a clear demonstration of the benefits of an early cycle development coming to the market at the right time.
Following next year’s dip in new space, more will become available as development increases to meet demand. But Land Securities – which has a further 2.9 million sq ft in the pipeline – is confident of further rental growth and London’s continued appeal to occupiers and investors.
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