The property opportunity behind the AI boom

In 2021, Daniela Amodei, Dario Amodei and a handful of colleagues left OpenAI to start their own fledgling artificial intelligence (AI) firm. Just five years later, that startup – Anthropic – employs thousands of people, commands a US$900 billion valuation and in April signed a lease for 158,000 square feet at One Triton Square. 

The breakneck expansion of these AI firms is something to behold. AI companies have taken 661,100 sq ft of office space in London so far this year, according to Knight Frank data shared with the Times. We expect the sector to account for about one million sq ft of take-up this calendar year, which would double last year’s figure.

“It is not just the volume of space being leased but the speed at which this occupier group is maturing,” Philip Hobley, head of London offices at Knight Frank, told the paper. “These firms are moving from flexible and early-stage space into substantial, permanent headquarters because they are securing funding, growing revenues, building teams and making long-term commitments to London.”

High-tech companies are on the hunt for about 610,000 sq ft of office space in the capital at the moment. Most are looking around the “knowledge quarter” around Kings Cross, Euston and Fitzrovia. See the Times report for more. 

Unique and irreplicable

The spectacular growth of the AI sector presents a massive opportunity for commercial real estate firms able to position themselves downstream. Last month, US industrial giant Prologis made a takeover approach for London-based Segro with a pitch heavily framed by its ability to capitalise on the AI and data centres play.

SEGRO rejected the approach on the basis that its US$16.6 billion bid undervalued the company, and it fleshed out its reasons for that in a presentation for investors this week – you can find an overview here. Net asset value should only be the starting point of the valuation of the business, the company said. That metric “fails to reflect the substantial future value in SEGRO's industrial and logistics development and data centre pipelines.”

“Our data centre pipeline is well placed to accelerate rapidly as hyperscaler demand remains focused on Europe's key Availability Zones, where land with power certainty and planning consents is extremely constrained,” SEGRO chief executive David Sleath added. “By contrast, combining with Prologis would materially dilute SEGRO shareholders' exposure to its industrials, logistics and data centre development upside opportunity, exchanging full ownership of SEGRO's unique and irreplicable portfolio for a materially lower shareholding in a different, more US-focused portfolio.“

Prologis published its response yesterday, which led on the fact that its dedicated in-house data centre team of more than 75 people would better “capture and maximise the long-term value of both companies' data centre pipelines” in contrast to the current SEGRO strategy of engaging in project-level joint ventures. There’s more here.  

Signs of life

There were more tentative signs of improvement in the UK residential market in the latest RICS Residential Market Survey, published yesterday. The new buyer enquiries metric registered -29%, marginally less negative than the -34% recorded in the two previous months and the least negative reading since February.

This follows news that house prices returned to growth for the first time in four months in June, Lloyds reported earlier this week. The 0.2% gain brought the annual growth rate to 0.6%.

Agreed sales metric in the RICS survey edged up to -32%, from -35%. Near-term sales expectations registered a net balance of -16%, improving from the recent nadir of -34% set in March. Feedback from respondents points to a broadly flat trend in sales volumes over the next 12 months, unchanged from last month. 

Listings are contracting sharply, which is going to weigh on activity in the short term. That metric hi -23%, down from -10% previously, which is the weakest reading for more than a year. A similar trend is evident in the market appraisals series, where the net balance slipped to -22%.

Elegant solutions

Prime Minister-in-waiting Andy Burnham is reportedly eager to reform property taxes. Replacing stamp duty and council tax with a new property value tax has been mooted and the idea is gaining momentum.

A group of economists that includes Lord O’Neill of Gatley – a Burnham adviser – published an open letter this week urging Burnham to adopt a single national contributions levy to replace income tax, employee and self-employed national insurance, dividend tax, inheritance tax and capital gains tax – see the Times write up here. The group also called for an annual 1% property value tax to replace stamp duty and council tax. 

Stamp duty is a tax on mobility so has broad negative consequences. If we’re going to raise the same revenue, it’s more rational to tax the value of property each year than to penalise people for buying and selling it. That said, while the proposal makes theoretical sense, tax reform rarely stays as simple as it starts. Today’s elegant solution can become tomorrow’s patchwork of exemptions, surcharges and supplements.

In other news...

Companies stop spending after being ‘taxed out of existence’ (Times).