London’s property owners and occupiers have had to dig deep and explore radically different ways of operating since March as the capital turned into what Duncan Owen, global head of real estate at Schroders, described as a “doughnut”, with little activity in the middle, courtesy of the pandemic.
Footfall on London’s streets remained low, with office workers staying at home and travel restrictions preventing any meaningful return of tourism, resulting in many landlords employing a slew of measures, including waiving rents and changing up lease agreements, to help tenants survive.
“Ultimately, we are a part of the same ecosystem as them and we want our streets to be full, vibrant and active, and our tenants are crucial to that… where we can help, we will,” James Raynor told EG in his first interview as chief executive of Grosvenor Britain & Ireland in April.
But London’s landlords have also had to be realistic. “As much as we hope everybody will survive, not everybody will. We just have to manage that,” Brian Bickell, chief executive of Shaftesbury, which specialises in niche and boutique occupiers, explained to EG in June.
It hasn’t been just London’s smaller tenants suffering either. Katherine Russell, John Lewis’s head of real estate, planning, policy and commercial, predicted back in May that the retail sector was “only on the cusp” of what is now becoming a long casualty list.
The department store chain has not been immune and pursued planning approval over the summer to turn 45% of its 678,700 sq ft Oxford Street flagship into flexible retail or office space.
Landlords have also had their own issues to navigate with tenants not being in a position to pay rent, as Criterion Capital’s head of asset management, Andrew Sell, told EG in July: “We have debt providers to repay and we have to find the revenue to pay them every quarter.”
He added that the moratorium had given tenants “a massive excuse not to pay us, and some of them are taking full advantage of that”, hinting at the tensions bubbling under the surface.
Cadogan chief executive Hugh Seaborn admitted in July that supporting the estate’s tenants was costing it “a lot of money” and warned of “further bumps in the road”.
London’s councils tried to help by embarking upon pavement-widening projects and the fast-tracking of licensing to enable tables and chairs to be set up outside venues in an attempt to help bring people back to London’s streets.
“[It was] very clear that until people felt comfortable that they could move around the pavements safely, they weren’t going back to shop on Regent Street or Oxford Street, and we need those streets to come back to life. We need them to be able to open,” Rachel Robathan, leader of Westminster City Council, told EG in an interview in the summer.
She also signalled her plans to push forward with making Westminster cleaner and greener, while over in the City of London the focus has been on diversifying the occupier base and making sure buildings with a “shelf life” of more than 30 years are developed within its environs, Alastair Moss, chair of the Square Mile’s planning committee, explained to EG.
Looking to the future
Adaptation and future-proofing crept further and further up the agenda for London’s landlords as lockdown conversations quickly turned to the fate of offices as people adapted to working from home, putting wellness and sustainability at the centre of the debate.
Gerald Ronson’s Heron International created a digital twin for the Salesforce Tower at 110 Bishopsgate, EC2, to ensure its long-term competitiveness against newer buildings in the City of London in attracting occupiers, while also enabling it to become net-zero carbon and reduce running costs.
Grosvenor adopted the use of antiviral and air-purifying paint across its portfolio, to help with its sustainability, air quality and wellbeing goals, and signed its first green lease with a tenant, while Hong Kong-based Tenacity unveiled plans for an all-electric 31-storey tower at 55 Gracechurch Street, EC3.
London’s burgeoning life sciences sector was also put under the microscope by many, as a result not only of the anticipated boost for the sector owing to the pandemic, but also its shift to a more tech-based industry, which has resulted in space requirements more akin to offices for tasks such as computational modelling and simulation. The sector emerged as a potential saviour for the capital’s landlords if traditional office occupiers slim down their space needs long-term as developers expect them to.
“What it has got over other sectors is that it requires physical facilities,” Sven Bunn, life sciences programme director at Barts Health NHS Trust, told EG. “It needs labs and for people to come in. From a property point of view, it’s going to be quite resilient to the changes being brought about by Covid.”
Landlords are also looking more and more towards temporary uses to fill vacant space, keep places relevant and avoid business rate payments. Options range from Covid testing centres and vertical farms that also help reduce the carbon footprint of a building to providing filming locations for media production companies such as the BBC and Netflix, which are attempting to keep up with the public’s insatiable demand for content.
The future of the office
Landlords in London are still expecting its offices to have a future, with Great Portland Estate’s boss Toby Courtauld claiming in November that the role of the office “has got more important, not less” over the course of 2020, based on his own firm’s experience.
He said that GPE’s effectiveness across its operations had become “materially stronger” once he and his colleagues were back in the office in September. “There was more creativity, more collaboration, more discussion, more ideas being generated. This idea that we can do all of that remote from each other in two dimensions on a screen to my mind is nonsense.”
Gerald Kaye, chief executive at Helical, also told EG that working from home was “pretty lonely and boring”.
“How does your team develop when their only interactions with colleagues is via Zoom? How do the younger members of the team pick up the experience from the more experienced people around them?” he said. “When you’re sitting in an office, you’re listening to all the conversations going on and absorbing it. You just don’t get that at home.”
Even so, he does believe offices have become “too densely packed” and the days of hot-desking are probably over.
Maxwell Shand, co-founder of developer YardNine, expects future buildings could give over 20% of their space to providing amenities for occupiers. “Gone are the days where you just have a reception area and offices upstairs,” he said.
Jamie Ritblat, chairman and chief executive of Delancey, at the end of October, despite a second lockdown being on the horizon, was still looking on the bright side, but admitted that if he and his team had been taking on the challenge of masterplanning 25 acres in Earls Court two years ago instead of today, they would have almost certainly designed something that would already be out-of-date.
London’s developers continued to put their faith in the capital, bringing forward a multitude of planning applications. Landsec got the go ahead for Timber Square, a zero-carbon office at 25 Lavington Street, SE1. While Orion Capital Mangers submitted plans for the revamp of the soon-to-be former London headquarters of BT, Brookfield pondered plans for EG’s HQ at 99 Bishopsgate and the London Stock Exchange appointed CBRE to look for a partner to take forward its development plans for a new scheme in Shoreditch.
“If there was a wholesale lack of faith in the office market we wouldn’t be seeing the level of pre-application advice that we’re giving,” said the City’s Alastair Moss. “People wouldn’t spend millions of pounds going through any of these [planning] processes if they felt there wasn’t a future it.”
However, in looking ahead, challenges and tensions remain on the horizon for property’s owners and occupiers.
Cities like London, where the majority of the working population has to commute in, are likely to struggle to attract people back in, Link REIT chief executive George Hongchoy told EG in November. This is because even once the pandemic subsides “no one wants to be squeezed into those [train] carriages,” he said.
His concerns, however, were not enough to put him off spending £380m in July on a 17-storey, 452,878 sq ft office building in Canary Wharf – one of the biggest London office deals in very quiet 2020.
According to Radius Data Exchange’s London Offices Market Analysis, investment into the capital’s offices by the end of Q3 stood at £3.6bn, a 41% like-for-like drop on 2019, while take-up at just over 4m sq ft was less than half of the long-term average for the opening three quarters.
“It’s certainly harder to sell an office building that no-one is actually using, which is understandably discouraging some investors away from the sector,” Zachary Gauge, European real estate analyst at UBS-AM Real Estate and Private Markets, told EG in September.
However, he added that a “significant amount of capital” remained interested in buying property in London. This was evidenced by several large deals completing in Q4, including ARA Dunedin Asset Management’s purchase of CPPIB’s 50% stake in the Nova estate in Victoria, SW1, on behalf of Singapore-listed Suntec REIT for £430.6m and Sun Venture spending £552m buying office buildings 1 and 2 New Ludgate, EC4, from Landsec in December.
As the year draws to a close, London remains hard hit by the pandemic. Tier-four restrictions will hit businesses hard, particularly those in the leisure sector. But the capital is robust and, pandemic or Brexit, investors and occupiers will still look to London for trophy assets.
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