As the March 2019 Brexit deadline approaches, and the probability of Britain leaving without a deal seeming increasingly likely, why are foreign investors so keen to snap up London office space?
With the economy in the state of a residential property slump, now may not seem like the prime time to be signing expensive office leases. However, more than 5 million square foot of central London office space were let in the first half of 2018. This broke the previous record set in 2013.
Tim Roberts from British Land told The Telegraph: “If you asked anybody after the referendum if they thought they would be doing the same volume of lettings over the next two years, all of us would have said no.”
Chief Executive of property investment and development company Derwent London, adds: “There’s life in the office market… we’re ahead of where we thought we would be. Over the summer period, which is normally extremely quiet, our leading teams were busier than they’ve ever been.”
Development of King’s Cross
It seems as if the sea of new buildings emerging around King’s Cross, is a strong indicator of what’s been driving this demand. Colthorpe, who have been tasked with enlivening King’s Cross said: “Ten years ago it was a bit of a sea of mud and down-at-heel”. Now King’s Cross couldn’t be more different, as global companies have set up HQ’s in this area.
Currently, Google occupy office space between King’s Cross and St Pancras stations. Last year they signed for an even larger site opposite their current office, to house 7,000 of its employees. Fellow Silicon Valley company Facebook, will become Google’s neighbour in 2021, when it takes over a site on top of a recently let office, just off Oxford Street. These expansions follow Apple’s lease of six floors in the redeveloped Battersea Power Station.
Media Giants and flexi-offices contribute to the demand
International media businesses have also expressed a strong interest in London office space. Advertising giant Dentsu Aegis, committed to a 310,000 square foot space in a new British Land building, close to Euston station this month. Fellow Japanese-owned company Sony Pictures, signed a lease for a 77,000 square foot space in Paddington back in June.
A growth in flexible office providers, such as WeWork, has also contributed to the office boom. The New York-based subletter has snapped up office space across the globe, with 39 locations in London alone, their second-largest operating city.
Demand but no supply
Demand may be booming, but supply is yet to catch up. An increasing number of companies sign up to pre-ets and agree to lease a building. However, these companies have no intentions to move in until years after initially signing the lease. Nearly 3 million square feet of pre-lets have been agreed this year, the highest levels again since 2013. This increase reflects a reluctance from developers to build new sites, before they have locked in tenants.
London: A Magnet for Asian Investors
This strong demand for London office space has helped to support a continuous inflow of foreign cash. Across the globe, the capital remains the world’s biggest ‘magnet’ for international investment. Last year London attracted $25 billion, all thanks to a 47% rise in cash from Asian investors. A landslide victory over second-place Hong Kong.
Julian Sandback from JLL, says as cash from Hong Kong (the largest investors last year) has decreased, South Korean investors have picked up their slack.
The question is now whether the London office sector can continue this strength, in the run up to the Brexit deadline, especially if no deal is reached.
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