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With its shiny glass and stainless steel façade and looming spire, the 230m Heron Tower certainly makes its presence felt on the City of London’s changing skyline.
London’s newest skyscraper may have just opened its doors last month, but it is already being noted for its stunning views as much as for the four sharks — along with 1,000 fish — housed in the eye-catching 70,000-litre aquarium in its lobby.
Also noteworthy is the fact that developer Heron International managed to keep the project going at the height of the financial crisis, even as other similar skyscraper projects were put on hold. Heron now stands to reap the benefits, as the project is bringing 440,000 sq ft of office space into a market that is becoming increasingly bullish about rental growth for prime London office space.
Demand for office space in Greater London increased dramatically in 1Q11, outperforming all other sectors and regions of the UK’s commercial property market, the Royal Institution of Chartered Surveyors (RICS) reported recently. As a result, rental expectations are also increasing at the fastest pace since 3Q07, RICS says in its latest UK Commercial Market Survey.
As the UK economy works towards a recovery, much of the country’s property sector continues to struggle to regain its pre-financial crisis footing. London’s property market, however, seems to exist on a parallel plane of its own. According to Knight Frank, London’s West End is once again home to the world’s most expensive office space, with rents in 2010 rising by a whopping 31% to £85 (RM415) per sq ft (psf) per annum. This increased by another 6% to £90 psf in 1Q2011.
Rents in the City financial district are less inflated but even so, when the Heron Tower signed on its first tenant — legal firm McDermott Will & Emery — in July 2010, it was at a rate of about £55 psf, the highest in the City since the onset of the recession, the Daily Telegraph reported.
Much of the optimism for prime London office rental growth has been attributed to two factors. The first is a pick-up in demand owing to the improving economic and business climate, particularly in the financial-services sector. In London’s West End, media firms’ expansion plans have seen companies such as Google increasing their long-term office requirement to 400,000 sq ft and NBC Universal taking up 112,000 sq ft at Central St Giles, property consultancy Jones Lang LaSalle says in its 1Q11 report on Central London office market.
As with London’s residential property sector, the second factor driving rental growth for office space here is the lack of supply. There has been a dearth of Grade A — brand new, recently developed or refurbished — office space in Central London, as many commercial development projects were put on hold during the financial crisis. Knight Frank’s research found that at the end of 1Q11, the availability of new and refurbished office space in Central London was nearly 50% lower than its mid-2009 peak, while the vacancy rate of 7.4% was similar to levels seen before Lehman Brothers’ collapse in September 2008.
According to property consultants DTZ, only 1.3 million sq ft of new and refurbished office space is expected to be constructed in 2011, 1.2 million sq ft less than in 2010. By comparison, 3.71 million sq ft was built in 2009 and 3.74 million in 2008. Those following the market closely say that apart from the Shard development near London Bridge, which will make available about half a million sq ft of office space upon its completion in mid-2012, supply of Grade A office space will continue to remain tight until 2014.
This is when recently revived skyscraper projects in the City of London, such as Land Securities’ 20 Fenchurch St (aka the Walkie Talkie) and British Land’s Leadenhall Building (aka the Cheesegrater) are expected to be completed. The Guardian reported recently that a third of the Cheesegrater had already been pre-let to US insurance firm Aon, at £55 psf. Such a commitment in signing up for yet-to-be-completed space is seen as another positive sign for the market. All of this points to expectations of further rental growth for prime London office space in the next couple of years; Jones Lang LaSalle is forecasting rents to hit £100 psf in the West End and £60 psf in the City by year-end.
While property consultants are bullish in their outlook, the developers themselves are, however, understandably cautious. Heron Tower, for example, is currently only 20% let and some in the market feel it will be a tall order filling the building over the next 12 months. The Shard, which will become Europe’s tallest commercial building when it is completed next year, started looking for tenants early this year but has yet to secure any pre-let arrangements.
In early April, Heron chief executive and veteran developer Gerald Ronson had said that it was unlikely that “growth will come from a flood of businesses seeking new office buildings for expansion”.
For now at least, it seems that Ronson might be mistaken.
Lim Yin Foong was editor of Personal Money, a personal finance magazine published by The Edge Communications, from 2001 to 2006. She is currently a freelance editor based in the UK.
