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Will Rising Rents Prompt London Businesses to Plan a Great Escape?


28-Jan-16 12:01
london-business-district_web.jpg

High office take up in London, combined with the limited room for growth in desirable areas has put pressure on businesses that wish to expand their facilities – or even remain on the same level – in the UK capital.

 

For London based-businesses, the International Property Measurement Standards Coalition’s new International Property Measurement Standards (IPMS) will come as bad news. The new standards, which were introduced at the turn of the year, will include unused features when measuring office space. According to experts, these reforms will serve to further inflate rental prices, raising questions as to the economic value of locating a company in London.

 

The city has long been touted as one of the most expensive locations in which to rent, with Procurement Leaders’ Property Leasing report showing the price of office space to be far greater in London than cities in other countries. According to the report, the cost of an office in London was 53% greater than rents in New York and Tokyo, and 58% more than the price businesses pay in Paris. The trend has since continued, with real estate group JLL declaring that “an exceptional run of leasing activity” will likely continue in 2016. That means that rent increases in the most desirable areas – including a 12% price hike in the City of London – will occur as a result of fierce competition for office space.

 

Most companies – if their business is not in property – will find it hard to believe that after finding, securing, funding and customising an office for the needs of their organisation, they will have to pay additional costs for non-utilised space such as columns, buttresses, party walls and other structural intrusions. Previously used standards, such as net internal area (NIA), allowed a competent assessment of office space and were used widely throughout the UK and beyond, Martyn Markland, principal consultant at the Tenants Advisory Group, argues.

 

In fact, he estimates the IPMS could cost UK businesses up to £1bn per year.

 

Markland’s report, Businesses face £1bn bill for office space they cannot use, estimates this will translate to an average hike in rents of 12%, unless the landlord decides to offer tenants a less expensive price per square foot. That, however, is unlikely, given the outstanding demand for business properties that London has witnessed in recent years. As a result those columns and party walls will artificially inflate prices, creating uncertainty for based in the city.

 

The only alternative may be to move towards the green belt land that surrounds the capital – or even further afield – as HSBC showed when the bank announced it would relocate its UK retail banking operations to Birmingham in 2017. Time Inc UK, meanwhile, the owner of more than 60 magazine brands, is set to move many staff out of London to Hampshire, UK. In November 2015 FMWorld cited research from Savills that suggested overseas investors are also starting to look seriously outside of London, with £10.5bn invested in regional commercial property since the start of 2015. This investment, together with planned infrastructural improvements, may prompt renters to consider locating an office beyond the boundaries of the Big Smoke.

 

This article is a piece of independent writing by a member of Procurement Leaders’ content team.


Aleksei Gontsarov Alex Gontsarov is a Procurement Leader Research Analyst. He comes from a research background with strong skills in data analysis and experience in the pharmaceutical industry.

 
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