Though the recent IRA bombing in the Docklands has made major headlines, through all the years of unrest, London has remained a viable market for U.S. invesment. In any event, this London feature promises to be the first of many focusing on overseas real estate markets. The story, written by one of Europe's top property writers, David Sands with Estates Gazette, sheds some remarkable light on the state of London's property market.

London's property market is shifting uneasily as the emerging Docklands district to the east flexes its muscles. Last year BZW, the investment banking arm of major high street bank, Bar, clays, defected to the 4.3 million sq. ft. Canary Wharf office giant in Docklands.

The City Corporation guards its Square Mile extremely closely. The defection stung its chairman of policy and resources committee, Michael Cassidy, into conducting an unprecedented public war of words with Canary Wharf chairman and chief executive Sir Peter Levene, accusing him of poaching occupiers from the city's patch.

In January, BZW announced it would also move its equities and corporate finance divisions to Canary Wharf, which the investment bank said would stay in the city; in total BZW has taken 690,000 sq. ft. in Docklands.

Last summer, Cassidy and Sir Peter buried the hatchet. Commenting on the latest decision by the bank, Cassidy said: "I am totally relaxed about it. Corporately, it had already made the decision to go and this is just filling in the gaps."

He also pointed out that you win some, you lose some. Two other large banks, ABN Amro and Deutsche Morgan Grenfell, have elected to base their new European headquarters in the Square Mile.

The latter are Dutch and German banks and their decision to set up a big ship in London confirms that prospects for the capital are looking rosy. Stronger growth in output and employment is predicted for the next two years, which will lead to more take up of offices.

This, coupled with a falling vacancy rate in top-quality space, a lower level of rates (The U.S. equivalent to property taxes) compared with most of the provinces, should prompt substantial commercial rental growth in the capital up to the Millennium.

Last year investment and letting activity in central London was comparatively quiet. Take up levels are largely at the same level as last year - and in some areas they are lower. Largely, headline rents remain unaltered and yields, too, are more or less stable.

According to professor David Cadman of Property Market Analysis: "If double digit property returns are to be achieved this year then, even with a return to selective rental growth, an inward shift in yields of some 1/4% will be required."

The good news is that the availability of top quality space continues to fall, and landlords are taking a more aggressive stance over lease incentives. A glut of empty secondary space has caused problems, often exacerbating occupiers' difficulties in getting rid of old offices when they want to move to new ones.

Although the number of investment deals has fallen, U.K. and overseas purchasers continue their search for well-located rack rented buildings let to quality tenants, with a lease term of over 15 years.

Another, massive vote of confidence in London property was the 750 million [pounds] purchase in january of Canary Wharf from eleven creditor banks. The buyer was a consortium put together by Canadian Paul Reichmann - one of the brothers behind original Canary Wharf developer Olympia & York.

The new owner is International Property Corporation. It is backed by major international investors including Saudi Prince All Waleed and Michael Price's Mutual Fund in the United States.

Meanwhile, according to chartered surveying firm Grimley, investors have indicated that they would bid yields close to 5% in Mayfair and St. James's in the West End, plus prime areas of the city of London. An example is BZW Property Investment's purchase of 120 New Cavendish Street, W1, a 1993 building let at a rent of 17 [pounds] per sq. ft., which sold for 9.5 million [pounds], reflecting a 5.6% yield.

Due to the former prevalence of the 25-year lease and upward only rent reviews, many top quality properties developed in the late-1980s are let at rents well in excess of current levels. These buildings are highly sought after by overseas purchasers in particular, at yields between 7.5% and 9.5%, depending on location and covenant strength.

There is a dearth of openly-marketed properties because offmarket deals are now more common. The advantage to buyers is that they are not in open competition for the property and are thus prepared to devote time in analyzing the transaction and formulating a bid. The vendors, meanwhile, will be seeking a premium bid to persuade them to sell the property and not go to the open market.

Speculative purchasing by property developers has made a welcome return to the market. For example, Greycoat has bought in Great St. Helen's and Bishopsgate in the city to provide buildings of around 50,000 sq. ft.

The last recession caused a long period of inactivity which has led to shortages of new space in some parts of the capital. Design and construction firm Kyle Stewart Properties confirms that the needs of the occupier will be the property market's focus for the 1990s. Comments director Chris Gilmour, "For companies requiring high quality offices the choice is now so much more limited."

Many developers want to take advantage of the shortage by building now. lan Henderson a director of U.K. property company Land Securities comments: "We see this as the right opportunity in the property cycle to undertake a number of quality redevelopments and refurbishments in carefully chosen locations. We think that the economy and the property market will continue to move forward and that our buildings will be completed when there is strong tenant demand."

In the city, Land Securities is building Regis House Island Site to provide 88,100 sq. ft. and it is refurbishing the 88,000 sq. ft. 110 Can, non Street. Land Securities has also scored notable preletting successes for schemes in the West End, such as the 247,000 sq. ft. Eland House in SW1, let to the Government, and 59-60 Grosvenor Street, W1.

London has three distinct office markets: West End, City and Docklands. According to property firm Chesterton, their vacancy rates are 7.7%, 9% and 39% respectively. In the West End prime rents grew in the 12 months to September last year about 1.3%. Headline rental levels are around 40 [pounds] per sq. ft., while prime yields are at around 6.3%.

Top rents in the city are about 35 [pounds] per sq. ft. Chartered surveying firm Richard Ellis predicts an annual rise of 5% to the end of the century, with levels peaking at 50 [pounds] per sq. ft. by 2000.

Docklands, meanwhile, is divided into two sub-markets: Canary Wharf, and the rest of the district. Canary Wharf, the infamous scheme which compounded Olympia & York's big problems has, under the new owners, proved highly successful. Now it is over 80% let. Rents of around 23 [pounds] per sq. ft. have been reported in the Tower, while headline rents in the rest of the scheme start at about 16 [pounds] per sq. ft. Outside Canary Wharf levels reduce to around 6.50 [pounds] per sq. ft.

Because the area is a relatively new part of the central business district, an investment market has yet to be established. But deals do take place: for example, 1 Harbour Exchange, a 236,000 sq. ft. building was sold, to Metrovacesa by Globe Trust for 18 million [pounds] at a yield of 10% on short, term income.

All three of London's office markets compete with each other for tenants. Docklands has been inordinately successful over the last 12 months because it has a lot of big empty office schemes. There are few new large buildings available in the Square Mile, and even fewer in the West End. In response to BZW's move to Canary Wharf, the City's planning authority rushed through planning consents totaling around 2.3 million sq. ft. in the last four months of last year.

Among other emerging opportunities in the capital is Thames Gateway, which was formerly known as the East Thames Corridor. It is a major economic regeneration area extending from Docklands and Greenwich in east London, to Tilbury in Essex and Sittingbourne and Sheerness in Kent.

As a result of the area's traditional industrial base either closing down or employing far fewer people, relatively high levels of unemployment exist. Consequently, central and local government have laid out comprehensive long-term investment plans for the district. The purpose of this coordinated planning guidance is to offer the private sector certainty if firm are planning business strategies for investment in Thames Gateway.

In the view of chartered surveying firm Henry Butcher this approach has greatly enhanced the chances of significant regeneration taking place in the area. The proposal will lead to a consistent planning policy, local economic decision making and a coordinated transport policy. This should make the private sector more willing to give up short-term capital to invest longer term.

There are a number of factors which potential occupiers and investors need to consider when contemplating any investment in Thames Gateway. Major infrastructure projects are either under way or planned, which will significantly improve the accessibility of the area and thereby its attractiveness as a business location. These schemes include the extension to the Jubilee tube line, which will bring the regenerated Docklands area in east London within 20 minutes' travel time of the West End.

Another link - called Crossrail - is proposed by London Underground and British Rail, which will link east and west London. In addition, the A14 road from Docklands to the M25 will be upgraded as will the link between Hackney, E8, and the M11 motorway (freeway).

These infrastructure projects not only improve Thames Gateway's accessibility to home markets but also provide excellent communications to Britain's major international markets via the Channel Tunnel Rail Link. And the proposed international passenger station at Stratford in E15 will also benefit the immediate surrounding area.

The district has been successful in bidding for extra public sector investment, Over 100 million [pounds] of central Government money has been allocated to partnerships in Thames Gateway; the western area of the district has won European Regional Development Funding. And Stratford, Bethnal Green, Dalston and Deptford to the east of the capital have been awarded 8 million [pounds] for development.

The Thames Gateway Planning Framework recognizes that new and improved cross river links are essential to increase the potential of the hinterland of important development sites. Contracts will soon be awarded to companies building the Docklands Light Railway extension across the river to Lewisham, SE13, and the Government is looking at a third crossing at Blackwall in SE10, a rail tunnel at Woolwich, SE18, a crossing at Gallions Reach and one close to Beckton in E16.

Thames Gateway has the potential to become an important engine for growth in Docklands and east London into the next century. Henry Butcher drinks the most important factor for the area's success is the improving facility of the private and public sector to set up partnerships and joint ventures.

Strategically, many investors have decided to spread their portfolio around the sectors, having had their fingers burned on pure office investment after the property crash of the late-1980s. Formerly, investors were not so keen on hotel and leisure opportunities, but they are now seizing on this sector because it is a relatively high growth area: over the past five years average occupancy has soared from 60% to 85%.

One example of what top, centrally-located hotels can command is the 383-bed, five-star Langham Hilton, which Ladbroke Group recently put on the market with a price tag of at least f,100 million. Sector specialists predict that southeast Asian, as well as rival international hotel chains, will be interested in buying it, not least because of its plum position in the West End.

Property agency Knight Frank and management consultancy Pannell Keff Forster have examined the Docklands area for potential hotel development sites. Land here is much less expensive, while severe planning constraints in the city and West End largely prevent their development.

According to Rod Parker, head of Knight Frank's Docklands office: "There is evidence of considerable hotel demand being generated by occupiers of office space in the district." He pinpoints various factors which will lead to higher demand.

These include higher traffic through London City Airport; further development phases at the Canary Wharf office project; a massive business park and university college proposal; a new exhibition and conference centre; plus a new urban village. These latter projects are planned for the Royal Docks and a total of five sites have been identified for hotel use, mainly in the Royals.

Given the massive oversupply in central London of obsolete second-hand office buildings, new uses are being found for them. Some empty office blocks are being snapped up for conversion by hoteliers. But many U.K. firms often find difficulty in funding their plans and the market is wide open for overseas investors. They should not, however, expect large, quick returns.

Although significant economic growth is forecast for the whole of London up to the Millennium, there are pockets where investment returns will be greater - in particular where the major new infrastructure projects are planned.