Billions at stake on the City’s skyscrapers as property punters ride roller-coaster market

8th December 2016

We’re standing looking down over the “lobby” of what will soon be the City’s latest skyscraper, which to my untrained eye looks just like a noisy, dusty, building site. Fork-lift trucks duck around and behind us, there’s the intermittent mortar-like thud of hydraulic pumps sending tonnes of concrete skyward to higher floors as the Scalpel slowly climbs out of  the ground.

This time next year, the cluttered grey expanse will be a glittering, spacious reception area; but more satisfyingly for Andrew Reynolds, managing director of US insurer WR Berkley’s development arm, the tower is already filling with tenants.

The 35-floor building — nicknamed for its tapered finish — could even be 70% full by next year after recent lettings to two insurance firms. A third — US insurer Chubb — is rumoured to be on the way. “If we can continue in that vein, we’ll be in a very good place by practical completion. In a buoyant market — forgetting Brexit, Trump, all those things — that would be good,” Reynolds says.

Berkley’s Scalpel is in a very handy place: virtually within touching distance of the front door of the Lloyd’s of London “inside-out” building, where brokers are themselves in and out striking deals in the traditional face-to-face market all day. There’s an obvious appeal for the tenants in being close to the action.

With the nearby Walkie-Talkie and Cheesegrater full up, the Scalpel almost has the field to itself despite the Brexit effect. “There was a lot of fear out there with David Cameron and George Osborne selling the fear factor but we have certainly seen no drop in interest from City and EC3 folk,” Reynolds says.

Even more bullishly, he adds on the referendum fallout: “I think London is well-placed. It is going to be a negotiation, we’re all going to have to come to a table and be a bit more adult about it. It was all terribly tedious in June: ‘we’re all going to die, London is going to be tumbleweed, we’re all going to Frankfurt’. It’s not happening, is it?”

That may be true for the insurance market, which has been heated up by merger activity, but the next 12 months or so look far more tricky for the wider City commercial office market, which has spawned scores of nicknames for its towers over the past few years. 

Nick Deacon, director of central London offices at TH Real Estate, one of the world’s biggest property investors, is building the “Can of Ham” at 60-70 St Mary Axe but is waiting for a pre-let before pressing on with the “Gotham City” tower at 40 Leadenhall Street. He was talking to a number of potential tenants before the referendum but those discussions slowed after the vote. “The business plan hasn’t changed but in reality, due to Brexit, it has just been elongated,” he says.

Deacon is much more pessimistic on the prospect for rents and reels off a list of at least half a dozen schemes expected to add about 1.5 million square feet of space on the market in the next year. They include Helical’s 1 Creechurch Place, Blackstone’s 20 Old Bailey and Mitsui/Stanhope’s Angel Court. 

Suddenly, after a few years of boom, it looks like a tenants’ market. “The reality is that unless a tenant needs to make a decision, they are unlikely to in the short term,” Deacon explains.

“We are likely to see the environment we saw in the eurozone crisis or the dot-com slump in the Noughties — nowhere near financial-crisis territory but an environment in which rents are likely to fall. The reality is that in some regards, they are already falling although people don’t want to admit it.”

But in property, the difference between fortunes and red ink is timing the cycle. After the relative glut of supply hitting the market in the next 18 months, a dearth of development augurs better fortunes for those delivering buildings to the market in 2019-20. That’s just when financial players should be making firm decisions on their needs as, hopefully, the clouds lift over the Brexit settlement. 

So British Land has decided to push on with its scheme at 100 Liverpool Street while Axa has pressed the button on the Lipton Rogers-designed 22 Bishopsgate tower, having reviewed the plans after the vote. 

Says Deacon: “History tells you that a smart developer goes in at a weaker point of the cycle and delivers buildings at the recovery point. It feels brave now but by the time it’s completed, most commentators feel that we’ll be in a recovery phase and there’ll be more tenant demand.”

Next big thing on the horizon

The next big daddy potentially looming over the City skyline by the middle of the next decade could be 1 Undershaft — unofficially known as the Trellis — which gained planning permission from the City of London Corporation last week.

The scheme is backed by Singaporean palm-oil billionaires Kuok Khoon Hong and Martua Sitorus through their investment vehicle Aroland. They have yet to give the final approval for the project but it is unlikely to be affected by the Brexit vote, according to architect Eric Parry. “In 2030, there will be another 100,000 people working in the City. They’ve got to accommodate those,” he says.

Before work can begin on the 73-storey building, however, the developers must address the issue of the Aviva Tower occupying the site, where the insurer has a lease until 2024 and has just spent millions on a major refurbishment. 

Industry sources say that, for the tower to proceed, Aviva would have to be bought out of the lease before the planning consent expires.

Alternatively, Aroland could cash in on the increased value of the site with planning permission for a new tower and sell up.

The Brexit victim

The clearest casualty of the Brexit vote so far is the scheme backed by Swiss private-equity firm Partners Group at 80 Fenchurch Street. 

Its website says building work on the 245,000-square-foot office block was due to begin earlier this year but the company failed to find a tenant and the project is on hold. 

When Partners unveiled the £200 million scheme in May last year, vice-president Stuart Keith said the building would be “perfectly placed” to capitalise on a shortage of space in the capital, and on “steadily climbing rents”. 

But now, in a much-changed climate, a Partners spokeswoman refused to comment on the investment.

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