Land Securities Eyes Recovery in London Office Market

January 23, 2013, 6:20 a.m. ET
Land Securities Eyes Recovery in London Office Market

By PETER EVANS

LONDON—Land Securities Group PLC on Wednesday said the London office market is showing signs of revival, as the company announced several new lettings on a 36-storey office tower it is building in the capital.

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Despite concerns that potential tenants from the insurance, financial services and banking sectors would put searches for new space on hold during a recession, the latest spate of lettings from the U.K.'s biggest property developer suggest strong demand remains for the right space and reinforces gathering belief in the resilience of the U.K. economy.

"People have got lease expiries coming up in buildings that are now out of date…[and] are using the opportunity to come out of buildings that are no longer fit for purpose," said Chief Executive Robert Noel. "There's an awful lot of space that has serious interest in it."

Land Securities on Wednesday announced a 76,000-square-foot letting at its 20 Fenchurch Street development—known as the "Walkie Talkie"—that it jointly owns with Canary Wharf Group to insurer Royal Sun Alliance. The building, which is due to be finished in 2014, now has more than 50% of its space pre-let or in solicitors' hands, significantly ahead of targets, according to Mr. Noel.

It is a similar story at the Leadenhall Building, another office tower in London's financial district, co-developed by British Land Co. PLC and Oxford Properties Group Inc. The building—nicknamed "the Cheesegrater" for its distinctive wedgelike design—is now 51% preleased after securing Aon Corp. and Amlin PLC as tenants in recent months.

Investors had been worried about London's prime office market in the aftermath of the financial crisis in 2008. At the time, a flurry of new development was under way, including the Cheesegrater and London's tallest building, the Shard skyscraper, but demand for new space tailed off as financial services firms delayed planned office moves and cut back on staff.

During the first nine months of 2012, financial companies accounted for just 13% overall leasing volume in central London, down from more than 30% before 2008, according to Knight Frank LLP.

But now there are signs of a revival in London and across other major European cities. Investment in European commercial real estate increased 48% to €41.52 billion in the fourth quarter of 2012, compared with the previous quarter, according to research from CBRE Group Inc.

Tenants are also attracted to new space because the total occupancy cost is often lower than their existing space. Newer office buildings tend to make more efficient use of space so the total space needed for each employee is reduced, said Mr. Noel. "We're buying our construction costs at the bottom of the cost curve, therefore our break-even rents are low, so our buildings are world class and the most efficient product in their marketplace," he said. That means that while the rent per square foot may be greater for newer space, the overall cost to a tenant isn't.

The U.K. economy is also showing fragile signs of recovery. Earlier on Wednesday, figures released by the U.K.'s Office for National Statistics showed unemployment fell by 37,000 in the three months to the end of November—its lowest level since spring 2011.

—Darren Lazarus contributed to this article.

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