Investors rush to convert office space as homeworking re-shapes the marketplace

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According to the Financial Times (FT), property investors have pumped around £2bn into converting under-used and unwanted London office space as the trend to Working from Home (WfH) continues, and as it looks like becoming an embedded employment practice in many inner city offices.

Property agents CBRE say that around £1.3bn of London office space has been bought up at bargain basement prices over the last 12 to 18 months, with plans to convert the vacant space to alternative uses. Other deals now in progress amount to a further £700mn, say the agents.

Ed Bradley, head of London office investment for CBRE told the FT that around 10 per cent of all new investments in the sector now represent a significant proportion of all new investment generated, as companies adapt their businesses to new patterns of hybrid working.

Mr Bradley said the trend is on an unprecedented scale for these conversions of mainly secondary office space, to be converted for new uses outside the traditional city office market.

Market slowdown

The UK commercial property market has slowed considerably since last year as higher interest rates have begun to bite. Tightening monetary policy was a significantly factor over the second half of last year, resulting in a decline in buyer activity, with sizeable adjustments downward in valuations.

According to CBRE, the figures for all commercial property values dropped by around 20 per cent year to date as a result of many institutional investors changing their asset allocations, with the sharp rise in government bond yields.

With major structural change, such as WfH and online retail affecting office and retail commercial property, a trend accelerated through Covid, better returns on other financial assets are leading traditional investors to see commercial property in a different light, value wise.

Positive industrial and logistics

Contrary to office and retail, the industrial and logistics sector has seen an outstanding almost 60 per cent rise in values, but now it appears the sector has become overheated given the tougher environment where money has become much more expensive.

Otherwise, all the main UK commercial property sectors – particularly secondary – have experienced substantial declines in value since late last year following what looked like a fairly positive turnaround and correction immediately after the abatement of Covid.

Slower decline

Although values have continued to fall in 2023, there are signs that the rate of decline is slowing. Experts in the industry feel that the speed and depth of the price correction experienced in the latter half of 2022 could now have worked its way through the system. The conclusion is that there are definite signs of new interest by investors.

This has been particularly the case as said with the trend for re-purposing from office and some retail space to student accommodation, hotels, laboratories and leisure. CBRE’s Ed Bradley told the FT that:

“We have seen several examples of alternative use investors outbidding traditional office investors by 10 to 20 per cent.”

Examples cited are the conversion of the former Ted Baker headquarters near St Pancras station into lab space, given its convenient location near hospitals and universities. This development is being financed by the Singaporean sovereign wealth fund. The Millbank located Nobel House is being converted to hotels and serviced flats which will be conveniently located near the Houses of Parliament.

Demand for high-end office space

Demand for high-end office space has held up well but less desirable properties and locations means that leases are not being renewed for that use. This trend however coincides with increasing demand for research facilities, and international student and tourist accommodation following the worst excesses of the pandemic.

Not all office buildings however will lend themselves to be easily converted due to their physical construction, planning restrictions and the investment that would be needed to make a viable alternative use. Here values will suffer most.

The forecasts

Overall, average capital values for commercial property are forecast to end 2023 below where they started the year. Given the outlook for more interest rate rises until inflation is brought under control, back down towards the Bank of England’s sustainable 2 per cent target, nothing much will change – property values are set to remain under pressure.

Outside of the office and retail sectors, rental growth expectations are positive for industrial and logistics according to the latest RICS UK Commercial Property Market Survey. Both prime and secondary industrial space, according to the survey, are edging higher, which indicates that the recent downturn in industrial values is due to higher interest rates and not a shift in occupier demand or requirements.

No let-up for inflation

There’s no letup yet in the inflation outlook with the Office for Budget Responsibility predicting it will remain above 6 per cent for the rest of this year, though stronger than expected data coming from the Purchasing Manager Index is signalling an up-tick in industrial activity, after the major contraction during Covid.

While employment levels remains rock solid across the UK, which is helping sustain tenant demand for commercial property, regardless of the state of investor demand, there are signs this could change. Interest rate hikes have a delayed reaction as mortgage holders and borrowers are often on legacy fixed rates until renewal dates arrive. There are serious and credible concerns that there could yet be a further downturn in the economy, though a full blown recession is thought unlikely.

Property agents unaffected – flight to quality

Meanwhile among all these commercial property difficulties, there’s a failure to dent the prospects for the major property agents. Market movement, sales and conversions, it all seems like “grist to the mill” for the likes of Knight Frank, a company that hit record revenues in 2022. The agent whose stock in trade is the sale and leasing of commercial properties, as well as residential accommodation, internationally, says it is benefiting from a “flight to quality”.

What is meant by that is businesses are opting for “greener” and more modern buildings in an attempt both to reduce their carbon footprint and to adapt their space requirements their for staff in a post-pandemic era.

Chairman of Knight Frank, William Bearmore-Gray, has said about last year:

“…for our London leasing agents it was probably one of their busiest years. The majority of the interest we are seeing is from companies which realise very clearly now that the office is a strategic tool to attract the best talent and increase productivity.”

A similar story emanates from agents Cushman and Wakefield who report a record number of office moves in 2022. This reflects the move to hybrid working (WfH), with most companies wanting less space in modern and better located buildings.

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Report reveals unstoppable march of BTR into private rented sector

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A new report has revealed that London now contains 38,600 build-to-rent (BTR) properties with a further 34,100 in the pipeline with the boroughs of Newham, Tower Hamlets and Brent leading the field.

The report, pulled together by Cortland Consulting, reviews platform HomeViews and trade association the UKAA, reveals the accelerating growth of this new sector of the private rented sector particularly in the capital, which is easily the UK’s largest BTR market.

Their report claims that BTR can provide the rental homes that London’s rapidly growing population needs – which has increased by some 622,000 over the past ten years.

Brent and Newham in particular have seen huge growth in the number of BTR units, which over the past decade have seen a third of new homes within their boundaries provided by this kind of private rented property.

Some 13% of all new homes in the capital on average were supplied by BTR over this period.

Sheer scale

What the report also highlights, and which may soon begin to impact private landlords with lower-quality properties, is the sheer scale of activity within London.

For example, in the boroughs of Woolwich and Ilford in North East London there are 40 operational BTR developments with a further ten under construction, eight granted planning and several more going through planning.

Read more: What does BTR mean for BTL landlords?

“Almost ten years since BTR arrived in the UK, the sector has delivered almost 85,000 homes nationwide, 46% of which – or 38,620 – were delivered in London,” says Iain Murray, Senior Director BTR Consultancy (Europe), Cortland Consult (pictured).

“BTR has proven itself as a highly effective mobiliser for the delivery of new homes, underpinning many of the capital’s most successful and flourishing regeneration projects: such as Wembley Park, Nine Elms & Battersea, Elephant & Castle, and Stratford’s Olympic Legacy transformation.”

Read the report in full.

View Full Article: Report reveals unstoppable march of BTR into private rented sector

FINES: Repeat offender to pay £49,000 over HMO safety failures

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A management company has been ordered to pay out more than £49,000 for fire safety failures at an HMO.

Monsoon Properties Ltd admitted breaches relating to a range of issues at the flat in London’s Tavistock Place, including inadequate fire detection system, obstructions to the means of escape, defective fire doors, defective oven and hob and smashed wall tiles.

Highbury Corner Magistrates Court fined the firm £10,000 for each breach of regulations, as well as costs of £7,020 and a £12,000 surcharge.

Camden Councillor Meric Apak (pictured), the borough’s cabinet member for better homes, says it isn’t the first time Monsoon Properties has been prosecuted.

He adds: “They should know – as should all landlords and management companies in Camden – that we will not hesitate to take landlords who we suspect are breaking the law to court. We will also seek to ban bad landlords. Our record of securing seven banning orders against rogue landlords is more than any other council in England.”

Penalties

The council’s recent cases include financial penalty notices issued against additional HMO licence holder Roukshana Begum and letting agents Snayders Limited.

Begum failed to comply with several licence conditions including the schedule of works required to ensure the property complies with Camden’s minimum HMO standards.

An undersized room was allowed to be re-occupied and a copy of the licence was not displayed in the property, which wasn’t kept in reasonable repair; it had a blocked wash hand basin and leak under the bath. There was also a failure to carry out fire safety works, to install wash hand basins and additional sockets in bedrooms.

The property has now been re-inspected by the council and most of the issues have been resolved.

View Full Article: FINES: Repeat offender to pay £49,000 over HMO safety failures

BOE beyond reproach?

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Dear P118, I don’t want these words to come across as a rant. I just want some peace of mind that the BOE is right in their approach to the current financial situation and that they’re not profiteering like everyone else (banks not passing rates to savers to name but one).

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TURMOIL: NatWest reveals rate rises for fixed-rate landlord mortgages

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­­Lender NatWest has been called out by commentators after it announced significant increases to its landlord mortgages.

The bank, which is till 38% Government owned, announced late yesterday that it was increasing the interest rates it charges on a range of home loans, including products across four mortgages for buy-to-let (BTL) purchases and one switcher range for landlords.

As well as increasing rates, NatWest has reduced the ‘end date’ of two BTL mortgages fixed rate periods, cutting a month off two-year and five-year fixed loan packages.

NatWest has increased its rates across all mortgage types, but appears to believe landlord mortgages are the riskier in the current economic climate, with rates rising most steeply for landlords compared to home movers, first timers and Help to Buy customers.

“Some increases are as much as 1.38% on specific deals, with a more palatable but unwelcome 0.2% increase across their standard products for remortgages and purchases. When will it end?!,” says Justin Moy of EHF Mortgages.

Luke Thompson of PAB Wealth Management adds: “Given these latest rates, it seems obvious that NatWest don’t want to be in the buy-to-let mortgage arena right now.

“My assumption is that they want to see where swap rates will go in the coming weeks and once they have a bit more of an idea on that front they may start to price buy-to-let products more competitively again.”

So what’s going on?

The events of last autumn when Liz Truss and Kwasi Kwarteng frightened the financial markets with their fiscal policy launch, brought the term ‘swap rates’ under the spotlight.

In the case of mortgages, swap rates are used by lenders to acquire funding for a set period of time – usually two, three, or five years, which is used for fixed-term mortgage deals.

Richard Fearson (pictured), CEO of Leeds Building Society, explains: “Swap rates are based on what the market thinks interest rates will be in the future.

“The change in bank base rate expectations meant that swap rates increased sharply – by 0.7 per cent when comparing today’s two-year swap rate to that of 11 May (following the last MPC decision).

“As a consequence, many lenders have had to change the price of their fixed-rate deals. If swap rates move rapidly, as we saw in the Autumn, lenders may have to pause or withdraw products both to manage service, but also because surges in demand use up the funding set aside for the fixed-rate deals that are on offer.”

The next MPC decision is due on the 22nd June.

View Full Article: TURMOIL: NatWest reveals rate rises for fixed-rate landlord mortgages

Rented bedroom with no windows?

admin    Uncategorized     agents

Hello, A friend of mine has been renting a room in London for £1,250 a month and he has just told me it hasn’t got any windows – which I told him is illegal.

What is the best way to handle this situation as he wants to move out before the tenancy ends?

View Full Article: Rented bedroom with no windows?