British Land Targets London's West End to Shield Itself From Market Shocks
Sixteen years after British Land Co. bought the biggest office complex in London’s main financial district, the area’s rents have fallen back to where they were then. Now it’s looking to the U.K. capital’s West End for stronger growth.
British Land, which sold half of the Broadgate complex last year, plans to switch the focus of its office business to the entertainment district, Chief Executive Officer Chris Grigg, 50, said in an interview. About 63 percent of its office buildings are currently in the City of London.
Grigg wants to make British Land’s shops and offices, which lost a total of 4.8 billion pounds ($7.3 billion) in value during 2008 and 2009, less vulnerable to financial shocks. He aims to own fewer City offices for shorter periods. In that part of east London, rents adjusted for inflation are 52 percent below 1975 levels, according to CB Richard Ellis Group Inc. The equivalent West End office rents are 28 percent higher.
“We would be perfectly comfortable with 50 percent or more of our offices in the West End,” Grigg said. “If you look at the rental performance of the West End over the City, you see better long-term growth.”
British Land’s office buildings alone were valued at 2.6 billion pounds as of March 31, according to its website. The company, Britain’s second-largest real estate investment trust, plans to spend 330 million pounds to redevelop a property on Baker Street in the West End that it bought in April, as well as expand the nearby Regent’s Place office estate.
Easing of Rules
Renting office buildings in the City was more expensive than in the West End until 1989, according to CB Richard Ellis. An easing of City regulation, known as “the Big Bang,” sparked a building boom, with U.S. brokers moving to the area and wanting large trading floors, said Colin Hargreaves, a director at Jones Lang LaSalle Inc. Planning in the West End has remained more restrictive.
The looser regulation also helped to fuel the growth of Canary Wharf, the district three miles from the main financial area, which offered bank tenants even greater choice in east London. City office rents subsequently fell as supply grew. Rents for both West End and City offices have been rising this year on demand for a dwindling amount of prime space.
“At some point in each cycle, everybody jumps on the City redevelopment bandwagon,” Hargreaves said. “If they try the same in the West End, they can’t find the sites. So you never get the feast and famine that you get in the City.”
More Than Rival
The proportion of British Land’s offices located in the City is about three times higher than its biggest rival’s. For Land Securities Group Plc, the U.K.’s biggest REIT, the figure is about 19 percent.
Values of prime West End offices also tend to exceed those in the City. West End yields, or rental income expressed as a percentage of the purchase price, have been comparatively lower for most of the past 20 years, according to CB Richard Ellis. A smaller yield usually indicates a higher price.
The West End is the world’s most expensive place to lease an office, according to CB Richard Ellis. Annual occupancy costs, including rent, taxes and service fees, were the equivalent of $182.94 a square foot as of March 31, the broker said in a May 5 report.
Demand for West End properties is coming from outside the U.K. as well. Land Securities agreed to sell an office and retail project on Oxford Street to a Qatar sovereign wealth fund on June 17 for 250 million pounds.
Not ‘Overly Attractive’
Given the rise in West End values, not everyone believes now is the time to invest.
“Due to strong yield tightening in the West End over the last six quarters, we don’t see prime West End offices as an overly attractive market at the moment,” said Hans Vrensen, global head of research at real-estate broker DTZ Holdings Plc.
It may be difficult for British Land to buy more West End properties because there is a shortage of attractive buildings for sale, according to Grigg. “It does depend on what becomes available,” the CEO said.
British Land views projects in the West End as longer-term investments, Grigg said. In the City, it would rather buy or develop buildings and then sell for a profit. It’s talking to potential partners about reviving a 225-meter (738-foot) tower known as the Cheese Grater in the district. The company may sell that once it’s completed, possibly in 2014, Grigg said.
British Land sold a 50 percent stake in Broadgate to Blackstone Group LP in September for 77 million pounds, with the private equity group assuming 987 million pounds of debt, as the collapse in commercial property values was bottoming out. The 25-year-old complex has 4.4 million square feet (408,773 square meters) of offices next to Liverpool Street Station.
Grigg’s company is spending 175 million pounds to build new space at Broadgate for UBS AG, the complex’s biggest tenant. The bank rents more than 860,000 square feet in four buildings with leases that expire over 2013 and 2014, according to British Land. The company may refurbish or redevelop more of the estate and add more shops, Grigg said.
“There will be a need to gradually work one’s way through that environment, in every sense, as leases fall due,” he said.
About 32 percent of British Land’s properties are offices. The rest are retail assets, including large suburban shopping parks and warehouses.