NREI Special: A Letter from London

This special report to NREI from our man in London, Richard Fletcher, gives an update on this international market.

After a number of false starts, the central London property market has finally followed the rest of the country out of recession. Rental growth, combined with rising demand from both occupiers and investors has created levels of confidence not experienced since the late-1980s.

In the first quarter of 1997, international and U.K. investors spent nearly e750 million ($1.13 billion) in the central London market. "As well as a substantial inflow of German funds, London has also witnessed strong interest from U.K. property companies as rental growth continues," says Tony Horrell, head of investment at property agents Jones Lang Wootton.

German open-ended funds, attracted by tax benefits and relatively high returns, are certainly leading the spending spree. Research produced by property agents Richard Ellis shows that in 1996 German investors spent over 620 million pounds ($930 million) in central London followed by more than 230 million pounds ($345 million) in the first quarter of 1997.

DIFA, which bought 3-10 Finsbury Circus for 41 million pounds ($61.5 million) in 1996, surprised the market earlier this year when it decided to fund the speculative 282,000 sq. ft. Thames Court development in the City of London. City agents believe it is the most significant deal of the year.

German fund Despa has also changed tack, setting up a new fund, Despa Europe, to buy properties requiring active management. It kicked off its spending spree with the purchase of two office buildings in the City of London from Prudential, a U.K. institution.

But it's not just Germans who are investing in the United Kingdom. Private investors, attracted by low interest rates, the current uncertainty surrounding the equity markets and high yields are also snapping up properties. Confidence among developers is also growing.

Docklands, London's newest business district, was hardest hit during the recession. Despite the imminent completion of a 2.5 billion pound ($3.75 billion) tube line, compared to London's two other districts, the City and West End, prime rents remain low at around 25 pounds ($37.50) per sq. ft. However, agents including Jones Lang Wootton report that leasing incentives in the area are finally starting to diminish.

The new tube line, due to open in 1998, will link Canary Wharf, Docklands' largest development, to both the City and West End, reducing travel times by at least half. Rod Parker of Knight Frank's Docklands office believes that the new infrastructure has helped attract major occupiers such as Citibank and Reader's Digest. Work on Citibank's 500,000 sq. ft. headquarters building at Canary Wharf has already begun.

Agents expect rents at Canary Wharf to rise rapidly as the supply of large floorplates in the City and West End diminishes further and the opening of the new tube line approaches. Canary Wharf is confident of attracting a number of large occupiers this year and is currently refinancing in order to provide the capital for future development.

But the Docklands area remains divided, with a distinct secondary market surrounding Canary Wharf. Rents barely reach 12 pounds per sq. ft. and parts of the secondary market are still scarred by the IRA bombing in February 1996.

Despite the difficulties, according to the London Docklands Development Corp. (LDDC), in the 1995-96 financial year more then 1.37 million sq. ft. of office space was let in the area.

Demand is also rising in the City, where high levels of take-up in the last three months of 1996 and in the first quarter of 1997 have not diminished demand, which increased by 840,000 sq. ft., or 18%, to stand at 5.8 million sq. ft.

The supply of space certainly won't be a problem if Sir Norman Foster is granted planning permission for his Millennium Tower. Foster's 1,265-foot transparent skyscraper would be the largest in the U.K. and would include offices, gardens and penthouses.

Critics of the scheme claim that the 1.5 million sq. ft. building, constructed of floor-to-ceiling glass at a cost of 400 million pounds ($600 million), would dominate the City and overshadow St. Paul's Cathedral, cause massive congestion and flood the City with unwanted space.

But Hong Kong & Shanghai Banking Corp. (HSBC) is said to be in negotiations to take 700,000 sq. ft. from the developer, Kvaerner, for its subsidiary, Midland Bank. Alan Winter, managing director of Kvaerner subsidiary Trafalgar House properties, argues that if the City is to compete with other European capitals, the tower is necessary.

NREI runs international news updates in selected issues to keep pace with international activity. Please e-mail your news items via the Internet to ben_johnson@intertec.com.