The chief executive of British Land believes parts of London are once again “thriving” and that demand for the best office space is on the up – a sign of hope after some tough years for the capital and its Covid-hit workplace market.
This morning British Land published its half-year results for the six months to 30 September. The REIT leased 1.6m sq ft over the period, at prices 12.2% ahead of ERV. A further 1.1m sq ft is under offer, 16.6% above ERV.
“The best parts of London are thriving – we’re seeing that in spades,” Simon Carter tells EG. “As businesses are coming out of Covid, they might want slightly less space, but they very clearly want better space. They’re upgrading and we’ve deliberately positioned the portfolio around that theme.”
Big plans on campus
Carter and co think they might have cracked the code for the modern office with British Land’s campus strategy at locations such as Broadgate in the City of London, Paddington Central, W2, and Regent’s Place, NW1. Since 2021, the company has exited most of its stand-alone office assets and doubled down on upgrading its campuses – including committing to a fourth at Canada Water, SE16. Today, Carter says, campuses account for 91% of the company’s office portfolio.
Take-up was down in the first part of the year. “That, from what we saw in our own leasing conversations, was a legacy of the mini-Budget in September,” Carter says. “That just caused people to pause. There’s obviously quite a large lead in time for someone taking new space in a development or a refurbished floor, so you saw lower activity in Q1 and Q2, and a pick-up in Q3.”
Active demand is now up, Carter says, and searches for space of more than 100,000 sq ft have risen to 24 requirements from 11 at the start of the year. “We won’t deliver every deal we’ve got in negotiation, but the picture is quite good,” says the chief executive. “Businesses have decided that quality and a central location is where it’s at, particularly for headquarters space.”
Analysts at Cushman & Wakefield are equally upbeat, predicting last week that central London office leasing will mark a post-Covid “normal” annual volume this year – take-up is expected to hit 8.5m sq ft this year, on a par with 2021.
Carter sees the centre of the capital as back in fashion. “Coming out of the pandemic there was this hub and spoke strategy spoken about – we weren’t convinced of that,” he says. “We’ve seen demand really go towards major transport hubs. I think that’s a reflection of employees probably living further from London and being spread out across the southeast with higher housing costs but more flexibility for hybrid working – so if you can be in one of the major transport nodes, demand is pretty good.”
In Broadgate, right by Liverpool Street station, the office vacancy rate is roughly 3%, Carter says, compared to 12% across the Square Mile as a whole. The West End too is proving resilient. “You’re seeing demand move in from the fringe to the core locations,” he says.
Farewell Facebook
One tenant is unavoidable in discussing offices with Carter. Earlier this year Meta, the owner of Facebook, paid £149m to hand back the lease on 1 Triton Square, NW1, at the Regent’s Place campus. The tech giant had already said it would scale back in cities including London, but was reported to have struck a deal with accountancy firm BDO to sublet the space. British Land decided otherwise.
We knew [Meta] didn’t want to remain a property company for the next 20 years, so we negotiated a surrender with them that then allowed them to walk away from the lease
“This was something we proactively sought to do,” Carter says of the decision not to take on the sublet. “There were two key drivers of return here – the premium itself but also the big increase in rents in that part of town, about 30%. So we could, one, get the premium, and two, get the higher rent. But also, we’re looking to do more life sciences and innovation space at Regent’s Place. Our problem was that we didn’t have much space to convert, and part of that building converts really nicely.”
Meta walking away from its deal was pointed to by office bears as proof of problems in the market. Carter thinks the fact that another company was ready and willing to take the space shows that the truth is more nuanced.
“We knew they didn’t want to remain a property company for the next 20 years,” he says. “So we negotiated a surrender with them that then allowed them to walk away from the lease. But I think the fact there was a customer to take the whole building tells you something.”
And don’t write off tech tenants yet, the chief executive adds. “That [surrendered lease] was a decision Meta took when big tech was struggling,” he says. “Now big tech is benefitting hugely with what’s happening from AI, particularly in that part of town. Amazon is expanding around that Principal Place office. I think after a bit of retrenchment, but growing hugely over the last five, 10 years, we’re now on a positive growth trajectory for that sector.”
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