This report is set out to provide our client with an impressive range of evidence and rigorous analysis of the problems and issues surrounding commercial offices in Greater London. We hope through this we can provide an accurate conclusion and profitable recommendations in regards to this sector. Facts surrounding the commercial office sector in Greater London “An office is a room designed for working in” Past commercial office sector position – why London was so appealingIt has been suggested by Schiller, 2001 that “We can identify six types of office users who are found in high-rented central areas: finance corporate headquarters, business services, media and entertainment, central government and flagships”. After the 1990 recession economic growth began on average 4% GDP in 1991. This considerable amount of growth came from a large increase in the service sector and the housing market.
This increase in the service sector especially meant great demand for office space thus construction in London grew considerably and foreign investment increased.Despite great efforts to decentralise, central government is still heavily concentrated in central London. London is the centre for both government and finance. Thus government is surrounded by foreign embassies while the bank of England attracts several hundred foreign banks. This can cause employment for several hundred thousand office workers. This centralisation of government in London also brought about other industries to have headquarters in the area. This became a ‘snowball effect by encouraging other headquarters and flagships.
Flagships are located in central London because it provides a good base from which to lobby and listen to government and the media. Due to this high increase in demand for office space the population in London grew (ONS, 2009) and this gave way to improved infrastructure and access to London. Effective infrastructure is another reason for why London office space demand has increased. This was noticed on a national and international level and so investment in supply of office space increased.
Due to high demands in office space the investment yields began to lower and stabilise, meaning the sector is strong and a safe investment.The reduction in yields did not lead to lower office rents, quite the contrary – office values increased thus rents increased too. Offices are seen as an attractive investment due to it being second best (after retail) in increasing land value. The 2000 economic downturn showed us how volatile offices are to economic cycles. This was a time were the technology bubble burst and confidence dropped in all investment classes. The London office sector reacted in a dramatic way compared to other property uses, such as retail.
Office yields increased to 8-10% making the investment class very risky, although not as risky as public shares.Public shares had dropped dramatically making real estate investment become appealing. Pension fund and other investment funds began to use commercial offices as part of their portfolio. This led to a large national and international investment in the office sector – predominately in London. The Bank of England also kept low interest rates making capital easily available, which helped investors fund their property purchases. The government also introduced REIT’s (real estate investment trusts), which considerably raised the profile of this sector.Also the tax efficiency of REITS broadened the range of investors leading to this asset being difficult to ignore. These factors were very encouraging and DTZ show us in 2006 i?? 66 billion was traded in property.
As the table shows below London is considerably the largest location for commercial offices investment. Current commercial offices sector position – the effects of the credit crisis The “credit crunch” has led to a downturn in the world economy. Many sectors are not growing; this is reducing the flow of income to companies.This has inevitably led to firms reducing in size or going into administration, thus reducing demand for office space.
As we have seen before, offices are the most volatile property type to economic boom or bust. The knight frank report show us three areas that affect commercial offices; investment market, demand/take-up and supply/development. The report of late 2008 tells us that, take-up fell by 22%, active demand fell by 18%, availability has increased by 35%, supply of new offices has dropped by 27%, prime yields are increasing and annual investment turnover reduced by 37% – all of which are compared to 2007.The FOCUS Report of 2008 told us – Asking rent in central London for commercial offices had reduced on average from i?? 34. 64sqft to i?? 30. 20sqft. Available office space had increased by 10%. Lease lengths have shortened which was an indication that break clauses had increased in use.
Investors were less inclined to invest in commercial offices due to falling rents and occupier uncertainty. The flexible UK lease structure is proving to be attractive to some investors but this method alone has not been enough to improve investor confidence.