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Skyscraper Builders’ Bets on City of London Sour as Banking Revival Fades

It’s hard to get more central in the City of London financial district than the Walbrook, a gleaming, glass box designed by Norman Foster’s firm that sits less than 200 meters (660 feet) from the Bank of England. Almost two years after its completion, the office building remains empty.

Walbrook’s owner, Minerva (MNR), isn’t the only company searching for a large-scale City tenant. Almost two-thirds of the office space completed in the area this year isn’t leased, even though the amount built was 43 percent lower than the 10-year average, Colliers International said in a report. New rentals dropped by 52 percent in the first half, Savills Plc said.

Property companies including British Land Plc (BLND) and Land Securities Group Plc (LAND) restarted City of London office projects this year and last, betting that the increase in 2010 rents would continue into this year as the financial industry bounced back. The prospects have dimmed over the last few months as Europe’s sovereign debt crisis and a stalling U.K. economy prompted companies to cut jobs and delay office moves.

“The deterioration in the economic outlook since the summer has forced developers to reconsider the timing and feasibility of schemes,” Digby Flower, an executive director at CBRE Group Inc. (CBG), said by e-mail “The development pipeline will be lower than anticipated six months ago.”

Employment in the City of London and Canary Wharf financial districts won’t pick up until 2014, the Centre for Economics and Business Research reported in October.

Big and Empty

Developers haven’t landed tenants to fill up most of the space in some of London’s best-known skyscraper projects, including the Pinnacle and a tower known as the Walkie-Talkie. Insurer Aon Corp. (AON) this month agreed to take one-third of the space in the Leadenhall building, nicknamed the Cheesegrater. As those projects proceed, cheaper developments are being planned using buildings and land on the London 2012 Olympics site in the east of the capital.

“The specialization of international financial services in London has served to make the fortunes of owners and occupiers intrinsically linked, creating a highly volatile, one-horse town,” Michael Marx, chief executive officer of Development Securities Plc (DSC), said in October.

The number of jobs in the City and Canary Wharf districts will fall 8.5 percent this year to 288,225, CEBR said. The research group, which had projected an increase in April, said that’s the lowest since 1998 and 19 percent below the peak of 354,000 in 2007.

Shrinking Workforce

“The labor force in those fields is clearly on the downside, so that will have its way on the London office market,” Koen Straetmans, senior strategist at ING Investment Management Europe’s real estate and commodities team, said in a Nov. 4 interview.

It’s “unlikely” that tenant demand will pick up significantly next year, according to Toby Courtauld, chief executive officer of Great Portland (GPOR) Estates Plc, which owns 50 percent of the 100 Bishopsgate development.

“I’m not sure people are going to make decisions on moving offices until they see some signs of stability in the broader economic environment,” he said in a interview on Nov. 9.

Rents Disappoint

City rents rose 22 percent in 2010 and the total space leased increased by 37 percent, according to Jones Lang LaSalle Inc. (JLL) That prompted landlords and brokers to predict strong growth this year and encouraged developers to proceed with projects without securing tenants in advance. The forecasts are being scaled back now as London’s banks and insurers are hurt by slowdowns in Britain and Europe.

CBRE said this month it cut expectations for 2014 City of London office completions by 50 percent from estimates made in April and lowered the forecast for 2013 by 18 percent. Construction ground to a virtual halt in 2008 and 2009 as the credit crisis hit the financial-services industry.

In January, Jones Lang predicted prime rents of 60 pounds a square foot annually in 2011 and a return to the pre-recession level of 66 pounds before the end of 2013. The current average is 55 pounds, the broker said Nov. 15.

JPMorgan Cazenove said it cut its rent forecast in August and now predicts no growth in the second half of this year, a 6.1 percent rise in 2012 and a 3.5 percent drop in 2014.

The bank said it expects prime rents to peak in 2014 at 58 pounds a square foot “versus an average forecast of 70 pounds per square foot by property agents,” because of increased supply, fewer leases expiring and rising concerns about demand.

‘Demand’s Slackened’

“We probably thought there would have been more rental increases already, but demand has slackened,” John Garwood, company secretary for Canary Wharf Group Plc, said in an Oct. 25 interview. Canary Wharf is a 15 percent shareholder in the Walkie Talkie. “Rents have gone up, but they haven’t spiked.”

To reduce risk, developers sold stakes in some towers before construction started. British Land is building the Cheesegrater in a joint venture with Oxford Properties Group Inc. of Toronto. Land Securities, which is developing the Walkie Talkie with Canary Wharf at 20 Fenchurch Street, predicted average rents of about 60 pounds a square foot.

“We see no reason to think that we won’t achieve those numbers,” Rob Noel, managing director of Land Securities’ London portfolio, told analysts on Nov. 10.

Aon, the world’s largest insurance broker, will pay an average rent of about 57 pounds a square foot for space in the Cheesegrater, British Land Chief Executive Officer Chris Grigg said in a phone call with analysts Nov. 15.

Bigger corporate occupiers will “never” take space in some of the towers currently being built because the buildings will be leased on a floor-by-floor basis, which isn’t suitable, according to Mike Bessell, a director of investment bank Evolution Securities Ltd.

Pinnacle Project

The 64-story Pinnacle tower in Bishopsgate, developed by Arab Investments Ltd., will have almost 1 million square feet (93,000 square meters) of office space. About a fifth has been leased in advance, Khalid Affara, managing director of Arab Investments said in March 2010. The company, which restarted the project in June this year, hasn’t announced further tenant agreements since then.

Minerva, delisted in London earlier this year after being bought by funds advised by Area Property Partners (U.K.) Ltd. and a unit of DV4 Ltd., is in talks with investment fund Schroders Plc about leasing the space to the asset manager, Estates Gazette reported Nov. 19. Oliver Hughes, a spokesman for Minerva, and Estelle Bibby at Schroders declined to comment.

Great Portland is in talks to sell half of its 50 percent holding in 100 Bishopsgate, Neil Thompson, the company’s portfolio director, said in a call to analysts on Nov. 9. It sold 50 percent of the development to Brookfield Properties Corp. in March 2010.

Sticking to Plan

Hammerson Plc (HMSO) Chief Executive Officer David Atkins on Nov. 9 dismissed the idea that the company might delay the Principal Place development, calling it “pure speculation.” The company is in talks with law firm CMS Cameron McKenna to lease part of the 16-story office building and expects development to start in April or May next year.

JPMorgan said today that commercial-property values in the City of London will fall 2 percent in the next 12 months. Prices fell 50 percent from 2007 through 2009 and were 37 percent lower at the end of 2010 than they were before the global financial crisis, according to a report commissioned by Development Securities that cited Investment Property Databank.

Overseas Owners

Foreign companies now own 52 percent of all office buildings in the district, up from 50 percent in 2010 and 8 percent in 1980, after a three-year acquisition spree, Development Securities said in the Nov. 22 report.

The cost of leasing space in the City is prompting businesses to look elsewhere for new space, including the site of the London 2012 Olympics. That includes legal firms that are “trying to take back office staff out of London, and use space more efficiently” Jones Lang said earlier this month.

Allen & Overy LLP moved human resources, information technology and finance jobs to Belfast in Northern Ireland from London, according to the legal firm’s annual review. The move will save the company 11 million pounds in the first five years and at least 8 million pounds a year thereafter, it said. Some of that will be real estate savings, said Andrew Brammer, head of A&O’s support services center in Belfast.

Future Rivals

Across the River Thames from the City, Sellar Property Group Ltd. is building the Shard, which will be the tallest tower in Western Europe when it’s completed next year. The company is seeking rents of 55 pounds a square foot for the lower floors and as much as 65 pounds for the upper ones, spokesman Baron Phillips said. Companies that are usually based in the City will be among those Sellar tries to attract, he said.

Lend Lease Group (LLC), the Sydney-based builder and developer, and state-owned London & Continental Railways, plans to construct 4 million square feet of offices in Stratford, next to Westfield (WDC) Group’s shopping center and close to the Olympics in a development known as the International Quarter. The company will seek financial industry tenants, Kevin Chapman, Lend Lease’s head of U.K. offices, said in an interview.

“The banks are close to Liverpool Street station, so a high proportion of their staff come through Stratford anyway on their way to work,” he said.

Rival Westfield is also planning an office development of 1 million square feet in Stratford and is also trying to attract financial-services tenants.

Longer Leases?

The economic slowdown may also prompt companies to extend existing leases, rather than seeking new space when they expire.

“If global macro-uncertainty concerns continue, they might take a five-year extension while they wait and see,” said Bessell at Evolution Securities. “These days, a landlord would bite their arm off for that.”

To contact the reporter on this story: Neil Callanan in London at ncallanan@bloomberg.net.

To contact the editor responsible for this story: Andrew Blackman at ablackman@bloomberg.net.

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Photographer: Chris Ratcliffe/Bloomberg

Land Securities, which is developing the Walkie Talkie with Canary Wharf at 20 Fenchurch Street, seen here, predicted average rents of about 60 pounds a square foot.

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Photographer: Chris Ratcliffe/Bloomberg

Land Securities, which is developing the Walkie Talkie with Canary Wharf at 20 Fenchurch Street, seen here, predicted average rents of about 60 pounds a square foot. Close

Land Securities, which is developing the Walkie Talkie with Canary Wharf at 20 Fenchurch Street, seen here, predicted... Read More

Photographer: Chris Ratcliffe/Bloomberg

Cranes stand on the construction site of 20 Fenchurch Street or the "Walkie-Talkie" building, developed by Land Securities Group Plc., in London. Close

Cranes stand on the construction site of 20 Fenchurch Street or the "Walkie-Talkie" building, developed by Land... Read More

Source: Millar Hare via Bloomberg

The "Walkie-Talkie" tower development at 20 Fenchurch Street is seen in this undated artist's impression. Close

The "Walkie-Talkie" tower development at 20 Fenchurch Street is seen in this undated artist's impression.

Photographer: Chris Ratcliffe/Bloomberg

Traffic passes the construction site of the Leadenhall building or the "Cheesegrater", developed by British Land Co., in London. Close

Traffic passes the construction site of the Leadenhall building or the "Cheesegrater", developed by British Land Co., in London.

Photographer: Chris Ratcliffe/Bloomberg

Insurer Aon Corp. this month agreed to take one-third of the space in the Leadenhall building, nicknamed the Cheesegrater. Close

Insurer Aon Corp. this month agreed to take one-third of the space in the Leadenhall building, nicknamed the Cheesegrater.

Source: British Land via Bloomberg

The Leadenhall Building by the British Land Co, also known as the '"Cheesegrater" stands in London in this handout illustration. Close

The Leadenhall Building by the British Land Co, also known as the '"Cheesegrater" stands in London in this handout illustration.

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