Commercial property: We can’t go on like this

We find ourselves in unchartered territory, facing many challenges and uncertainties. We have seen the value of commercial property stock swing between margins far more polarised than many of us could have predicted. Since the two-year pricing slump that eased in July last year, commercial property values have rebounded a whopping 15.1%. Many will have seen BlackRock and Hermes’ recent decision to put City skyscraper Tower 42 up for sale as further evidence of Britain’s real estate recovery, as they seek to profit from demand for larger investments in the West End and City.

But we must keep this in perspective. The fear remains that the recovery may slow this year as the banks begin a long-awaited programme of distressed asset sales that could trigger fresh price falls. Rents in the City are pushing up towards £50/ft2 but have a way to go before they get back to the £70/ft2 paid by Royal Sun Alliance at Leadenhall Court in 1989. We remain at risk, particularly if supply spikes unexpectedly in the medium term.

For some, though, hope is slowly returning as the sector edges its way towards recovery. Latest research from CB Richard Ellis reveals that prices rose 2% in March after a 1.4% increase in February; total returns, comprising rental value growth and capital value growth, now stand at 6.2% for 2010. Comparatively, occupier take-up is strong, with figures from Knight Frank showing that 7.3 million ft2 of office space was filled in the City in the 12 months to March 2010.

With a budget deficit of £167bn, it goes without saying that money is going to be tight when it comes to financing new development. The banks will now take an extremely selective approach, backing safe-bet schemes from proven developers that have sensible sales figures and rental values.

How many new schemes in London will not start because their viability is affected by the Crossrail levy? Isn’t it better that this is taken from the rates once the development in question is producing income?

 

Our approach to redevelopment and regeneration also needs some thought. It costs far too much to obtain planning consent, with an excessive amount of detail being required at an early stage. A simplified system allowing an initial degree of certainty as to land use, bulk and mass so the land value can be determined and additional investment considered would help expedite the often protracted and painful process. Detailed issues such as sustainability and disabled access could surely be considered at a much later approval stage.

I also question the viability of the ever-increasing section 106 tax and believe that the future rates income from a project should be used by a council to finance infrastructure, which in many cases is a precursor to the development. How many new schemes in London will not start because of the Crossrail levy? Isn’t it better that this is taken from the rates once the development in question is built and producing income?

One thing is certain, London is an international city that must keep pushing forward. The commercial property industry is realising that 2014-16 will be crucial years in the pivotal City market. A number of significant leases are due to expire or reach break clauses during this period, so we are faced by the prospect of some of the largest tenants in the City moving premises. If occupiers do not start planning for their lease expiries now, they risk being left with little or no option but to remain at their existing premises, despite its eighties construction date becoming as apparent as a power suit and a frizzy perm.

Developments such as Heron Tower are fine examples of the cutting-edge architecture that this country can produce and such projects will play a crucial part in keeping the market buoyant.