February 2013

LEGAL EASE: New life on lease

Alistair KennedyBattersea Power Station on London's South Bank is famously pictured with a flying pig on the cover of Pink Floyd's 1977 album Animals. But it's another Pink Floyd song that best describes the station today, and that is 'Money', £600 million to be exact.

That is how much the developer raised in just four days in January after reservations opened for 600 flats.

With interest from Europe, Asia and the Middle East, the sale became what is believed to be the fastest of a project of this type on record. So, is the city booming? And if so, what does this mean for investors looking at London?

For investment funds, the residential market can be a sideshow. In the UK institutional investment in residential properties is limited – though new developments like Europe’s tallest building,  the Shard, are increasingly looking at mixed use schemes that have offices, residential and even hotels. But in 2013, we predict the fundamentals for investment will remain – location and occupiers. The challenge we see this year for investors is meeting and anticipating the changing demands of occupiers.

While the new wave of skyscrapers in London like the Shard offer a premium location (but at a price) occupiers still want value for money over the life of the lease. That means inducements to enter into the lease such as rent free periods; careful management of transparent service costs; energy efficiency and creative use of space through intelligent fit-out and use of IT to facilitate remote working. But regardless of these extra costs, the biggest cost remains the space itself. According to a recent survey by Colliers, nearly a third of office occupiers reduced their space requirements over the past five years in order to reduce costs.

There is a clear trend that occupiers need less space, but it is not because they are doing less. Remote working and a flexible workforce reduces the need to house all staff in one place at one time.

This means flexibility is key and just as the “pop-up” has been a success story of the recession in retail markets the office market may follow with temporary space supplementing smaller permanent premium offices. We have started to see signs of this already. Fundamentally, leases are getting shorter. The BPF/IPD Office Survey 2012 reported that offices in Central London saw a decline from 6.5 years to 6.3 years in 2010. New technology reduces the need for permanent space as IT services can be piped into an office building though the internet. This will reduce the space required by a building’s IT infrastructure, moving it into “the cloud” and away from the City.

For Grade A space, the movement is slower but it is there. Although there is uncertainty in the office market, there is still a strong demand from occupiers in the City. And over the next five years about 50 million square feet of space will be impacted by known lease events – that includes leases coming to an end and anticipated breaks.  Occupiers will use this as an opportunity to review their requirements and landlords and investors will need to be smart to meet these new demands for space that is geared for those who are working less in the office and more from laptops and tablets, on the move and from home - perhaps overlooking the Thames river from their new flat in Battersea!

Alistair Kennedy is a partner at national law firm Dundas & Wilson

©2013 funds europe