Resilient rents put a shine on capital’s stalling office market

19th May 2017

London’s office market has remained unexpectedly robust since the Brexit vote but supply is beginning to outstrip demand at a time of growing uncertainty, according to Britain’s largest property company.Land Securities, whose £14.4 billion portfolio includes the “Walkie Talkie” building in the City, said that while Brexit had sent the business community into “uncharted territory”, it had not caused as much disruption in the commercial property market as expected.Rob Noel, its chief executive, said: “The market has stalled but we were expecting rents to weaken faster than they have done. Whether or not they will now weaken or whether we were wrong, I just can’t tell you.”The FTSE 100 company has spent two years selling off its smaller assets, completing developments in London, securing long leases with tenants and reducing its debt in anticipation that the negotiating power between office owners and tenants will switch as supply begins to overtake demand.A report from Deloitte Real Estate revealed this week that office vacancy in the capital had risen by the largest amount since 2009 in the first quarter of this year, to reach 5.8 per cent.

Land Securities said it had now completed the 3.1 million square foot development programme that it began in 2010 and had only 283,000 sq ft of office space left to let.Mr Noel said he was delighted that the company had decided to “pull the risk levers fully back” when vacancy rates were beginning to rise.“Timing on development is so important and that’s why we have chosen to wind down our programme, so it is shut down as of now,” he said. “We saw the occupational supply-demand balance shifting and the negotiating power moving away from the developer.”The company delivered a 5.5 per cent rise to £382 million of revenue profit, an underlying measure of pre-tax earnings that strips out fluctuations in property values, in the year to the end of March, despite having sold more buildings the previous year. It proposed a final dividend of 11.7p, meaning its full-year payout would rise by 10.1 per cent to 38.55p.However, pre-tax profit fell 91 per cent to £112 million because of a fall in property values. Adjusted diluted net asset value, the preferred measure of performance used by property companies, fell 1.2 per cent to £14.17 per share.Land Securities also has the largest exposure to UK offices among the FTSE 100 commercial property developers, with 20 per cent of its portfolio taken up by financial institutions. Its rival, British Land, has reduced its exposure to banks to less than 6 per cent.Mr Noel dismissed fears of bankers being moved out of London post-Brexit. “It’s highly unlikely we will reduce our exposure [to financial institutions],” he said. “London has been a global trading post for hundreds of years and will remain one during my lifetime. Even if a bank with 20 offices around London move out a couple of thousand of staff, they will have many staff left in London that need to be housed.”