UK: A Tall Order? How Are The Recent Trends In The Property Market Impacting On Businesses?

Last Updated: 12 May 2015
Article by Suzanne Gill and Claire Haynes

The London Tall Buildings Survey 2015 concluded that 263 tall towers are currently in the pipeline across London. 80% of the towers have a primary residential use and the number of tall towers currently under construction is up 36% compared with 2014. The consequence is that there will shortly be an enormous stock of new residential apartments on the market. Some commentators say that sales have already plateaued creating a surplus of luxury residential apartments. This has key implications for businesses as well as house buyers.

Why is this happening?

Residential developments offer a relatively quick return on investment for developers.  Weighty premiums are paid immediately on sale of the apartments. This allows developers to liquefy their investments and quickly exit the schemes.  When compared with commercial premises which offer a longer term investment with space let on market rent leases, the current trend is for developers to take a quicker buck opting for residential schemes.  Combined with the current shortage of housing and the relaxation in planning laws for changes of use of existing office space to residential, this has led to a shortage of new office developments in London.

What effect is this trend having on the market for commercial office premises?

The lack of desirable and available office space is starting to overheat the market for commercial premises.  Pre-lets of new developments are once again becoming the norm and space is being snapped up well ahead of practical completion of buildings. 

The consequence is that rents for commercial office premises in London have increased and they are expected to continue to do so as pressure on the supply of high quality office space increases.  Depending on whom you believe, London has become, or is close to becoming the most expensive city in the world to accommodate staff.

What are the consequences for businesses?

As limited office space is on the market, the options relating to business premises will need to be considered earlier by businesses to enable them to successfully implement their longer term growth plans or even just remain in the same part of the country. 

Major decisions such as whether to relocate the business to new larger premises or to extend the term of a lease of existing premises, coupled with improvement works should be considered and ideally made at least several years in advance.  This is to enable the business to secure suitable premises at a good rent in the event it wishes to relocate.  However, if these decisions are left until late in the day there is still likely to be a deal to be done, if the business can afford to pay a premium rent for space that other parties may also be interested in. 

Some businesses say that they are being priced out of the London market for commercial office premises and so the alternative is to move further afield, perhaps to an "opportunity area".  The potential impacts of moving out of prime central London office space or to a different area of London must be considered carefully by businesses:

  • For some businesses having a presence in a key London market is essential as clients expect this. 
  • Many businesses are reliant on a highly skilled workforce.  Will the business be able to keep its existing workforce and attract people in the future if it is to move to a different location?  Many people want to be located in specific areas of central London with their vast array of amenities and easy commute. 
  • For other businesses cost is king and relocation to an area which is not regarded as a prime office development may be the best solution.

Whatever the drivers of the business, it is no-longer wise to leave decisions relating to the premises to the last minute.  Future focused businesses are considering the options at an early stage so that they can achieve the best outcome for the business.  Some leases are protected by the security of tenure provisions of the Landlord and Tenant Act 1954: making best use of the rights granted to tenants by this legislation is a key part of any premises strategy.  If you would like to discuss any of these issues or the options which may be available to your business regarding its premises, please do not hesitate to get in touch.

Tomorrow's City, Today's Challenge

By 2030, the World Health Organisation estimates that over 50% of the world's population will live in cities. Wedlake Bell have hosted a series of lively panel discussions on the issues raised by this trend, both legal and non-legal and will continue to debate the important topics at a series of breakfast briefings.  The key points to emerge from each event so far are here. Our next debates in the autumn will be focussed on the implications for retail and healthcare sectors. Is the internet now a more important store than the high street or the mall, or is a physical presence essential too? What effect will the increasingly important "grey pound" have on housebuilders' plans? Will the affluent elderly create other business opportunities? Dates and speakers are being finalised at the time of going to press.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Suzanne Gill
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