Mayfair Office Squeeze Spawns New London Real Estate HubsNeil Callanan and Patrick Gower
Mayfair and St. James’s just aren’t big enough for all the companies that want a piece of London’s most expensive neighborhoods. Many are now settling for less prestigious city-center addresses, creating new hot spots in the office-property market.
Buildings are sprouting up in once rundown Victoria and King’s Cross, a former red-light district, as developers expand the area that commands the world’s highest office rents. Blackstone Group LP bought a property about a half mile (0.8 kilometer) from St. James’s Square to profit from a squeeze caused by conversions of offices into luxury homes. Land Securities Group Plc is investing 2 billion pounds ($3.2 billion) in Victoria.
The construction push comes as older workplaces in St. James’s and Mayfair, many built as townhouses, are turned back into homes to profit from soaring prices. Hedge funds and private-equity firms are taking most of what’s left, accounting for 55 percent of new office leases in the districts this year, Cushman & Wakefield Inc. said on Sept. 10.
“When you see occupiers becoming more transient because of that lack of supply, it creates opportunities on the fringe of historic prime areas to drive exponential rent growth,” said James Lock, managing director at Blackstone’s real estate unit.
While there are no precise boundaries for the West End, it’s usually considered the central business area west of the City of London financial district. It includes the neighborhoods of Mayfair, Soho and St. James’s and tourist attractions such as Buckingham Palace, the theater district and the bustling Piccadilly Circus commercial intersection.
Developers are seeking to exploit demand for larger and more modern offices in central London with access to transport links. Rents are rising throughout the West End’s fringes, according to Knight Frank LLP. In Mayfair and St. James’s, home to Europe’s largest concentration of hedge funds, they average 95 pounds a square foot, unchanged from a year earlier.
In Victoria, a gritty bus and rail hub between St. James’s and Belgravia that Mayor Boris Johnson has earmarked for revival, Land Securities’ projects include the Zig Zag Building, an office and retail complex with an undulating facade on Victoria Street. The U.K.’s largest real estate investment trust also refurbished a building across the road with about 200,000 square feet (19,000 square meters) of offices for tenants including retailers Jimmy Choo and John Lewis.
Rolls-Royce Holdings Plc agreed to lease 37,120 square feet of office space on two floors of Land Securities’s 62 Buckingham Gate building a few blocks away, the London-based developer said yesterday in an e-mailed statement.
“What’s great about Victoria is that we have sites that can accommodate buildings with floor-plates of 20,000 square feet or more,” said Kaela Fenn-Smith, Land Securities’ head of leasing.
American Express Co., Google Inc. and Microsoft Corp. already occupy modern buildings in Victoria near strips of offices built nearly half a century ago mostly to accommodate government bureaucrats. Land Securities is tearing down 1960s-and 1970s-era buildings to create the type of space companies desire these days, Fenn-Smith said.
Land Securities’ plans are “going to completely change the perception of Victoria” from a tenant’s perspective, Blackstone’s Lock said.
Blackstone sees an opportunity in the Adelphi Building on the Strand, a street known for theaters and its proximity to Trafalgar Square. It’s seeking at least 55 pounds a square foot for the lower three floors and more on higher levels of the 13-story tower overlooking the River Thames.
The New York-based firm, the biggest manager of private-equity property funds, plans to spend 25 million pounds refurbishing the Adelphi to attract tenants whose leases are expiring in Mayfair and St. James’s. It’s also trying to get technology, media and telecommunications companies looking for bigger spaces, according to Lock, who leads Blackstone’s U.K. real estate purchases.
Offices at nearby Soho Square, a favorite of technology and media companies like Twenty-First Century Fox Inc., go for 65 pounds a square foot, according to Lock. Workplaces on the Strand “can now accommodate those sort of rents,” he said.
Tenants occupying 26 million square feet of central London offices have the option to move by the end of 2016, according to Lock. Meanwhile, demand for central-London office space has risen 13 percent from a year earlier, broker Jones Lang LaSalle Inc. said in a July report.
As leases expire, companies looking for new space will have to consider districts on the edges of the best West End neighborhoods. Options are limited because vacancy levels in Mayfair, Soho and St. James’s were about a quarter below the long-term average at the end of June, broker Knight Frank said in an Aug. 1 report.
Kings Cross and Paddington are among areas on the edge of the West End set to benefit from better transport links such as Crossrail, a high-speed train line that will link Heathrow Airport to the Canary Wharf financial district, Deutsche Bank AG researchers including Simon Durkin wrote in a Sept. 3 report.
British Land Co. bought offices, stores and land near Paddington Station, the terminus of Heathrow Express trains, in July for 470 million pounds. The site, about 1.5 miles from Mayfair, will give the developer an annual yield of 6.2 percent when fully leased, Chief Executive Officer Chris Grigg said on an investor call in July. That compares with a 3.5 percent yield for offices in prime West End areas, broker Savills Plc said last month. Yields for the best U.K. property nationwide fell to
5.66 percent on average in August, the lowest in more than five years, Cushman & Wakefield said in a report yesterday.
“It’s those larger floor-prints which really make a difference,” Grigg said in a July 24 interview.
British Land, the U.K.’s second-largest REIT, also owns Regent’s Place, a development less than a mile from Oxford Street, where rents are more than 60 pounds a square foot, Grigg said. That’s an increase of more than 20 percent in less than two years.
Developers betting on the expanded West End will face mounting competition from new projects in the City of London, many offering cheaper rents and targeting the same technology, media and telecommunications companies. Amazon.com Inc. chose to locate south of Farringdon, on the City’s western edge, where rents are about 48 pounds a square foot.
Farther east is London’s emerging technology hub nicknamed “Silicon Roundabout” on Old Street. Derwent London Plc, a REIT focused on central London, is tailoring a 290,000-square-foot office complex to tech firms with construction set to begin next year.
Google opted for the West End’s northern edge in King’s Cross, buying 2.4 acres (1 hectare) of land that’s part of a larger development by King’s Cross Central LP near the Eurostar rail link to mainland Europe. The owner of the world’s largest search engine is building its new U.K. headquarters on the site about 1.5 miles northeast of Oxford Street.
Tenants “are drifting east from the West End,” enticed by cheaper office space neighboring companies with global brands like Google, said Guy Grantham, a Colliers International director in London. “We were expecting mostly media and technology tenants, but we’re seeing occupiers from the legal sectors and beyond” consider King’s Cross, he said.
Rents for the best buildings in Kings Cross are forecast to rise more than 20 percent to about 65 pounds a square foot by 2016, according to Colliers.
“These peripheral locations people talk about will no longer be peripheral,” said Mike Prew, a Jefferies Group LLC analyst in London. The developers of Kings Cross, “now that it’s been completely repositioned, they will make a fortune,” he said.