_Central London View - September 2017: Behind the cranes

An examination of our 30-year development data series shows that on average there has been around 9.0 m sq ft of offices under construction in Central London each year.  The majority of this has traditionally been funded by debt, which has been a contributing factor to some of the more extreme peaks in supply we have seen in previous cycles.  

For the most part, the pipeline has been historically controlled by UK developers, funded by domestic capital.  While overseas investors have dominated the market for built investment stock, there has been less appetite for involvement in development.

However, our analysis of London’s pipeline over the next five years reveals a significant shift in who is controlling development.

The percentage of development controlled by UK companies has fallen from more than 80% to around 50%, with a noticeable rise in the amount of space being developed by North American developers, as shown below:

Central London development pipeline, by developer nationality

However, further analysis shows the shift has been more extreme.  An examination of the source of funding, rather than the nationality of the developer, shows that North American developers are in the driving seat over the next five years; this analysis includes developments that may be fronted by UK firms, but where the funding is derived from elsewhere.

In the last five years, 61% of all space built across Central London has been funded by UK money, the majority (66%) by quoted property companies including the REITs.

Central London development pipeline, by origin of funding

Over the next five years, just 35% of all space currently under construction, or earmarked for speculative development, is backed by UK money.  Once again, almost two-thirds of this is controlled by quoted property companies.

The largest share of pipeline funding is currently in the hands of North American investors, who account for 43% of the five-year pipeline.  Amongst these are property companies such as Brookfield, but also corporates such as Goldman Sachs and Bloomberg, who are developing schemes for their own occupation.

This addresses an interesting point on Brexit and risk.  While UK firms are focused on the potential downside risks of Brexit, it is a less important issue for overseas investors, particularly those outside Europe.  They are aware of Brexit, but it does not dominate headlines or strategy; for foreign investors London remains a relatively safe and attractive market, not least because of the currency advantage.

In previous cycles, debt has fuelled speculative construction as the market has recovered, however this is unlikely to be a factor in this cycle.  This provides some assurance that speculative construction is unlikely to spiral out of control.