London office market yet to feel ‘true impact’ of coronavirus, says landlord
Job cuts and business failures will leave workplaces empty and hit rents
The real impact of coronavirus on London’s office market has not yet been felt, with job losses and business failures likely to increase vacancies and drag down rents, according to one of the capital’s leading landlords.
Derwent London, which owns the Brunel building in Paddington and the White Collar Factory on Old Street, said the “true impact of the lockdown” was yet to be reflected in the market, and predicted sweeping changes for workplaces because of coronavirus.
Vacancies across London’s offices will “undoubtedly” rise, according to Paul Williams, Derwent’s chief executive. That in turn is likely to put pressure on rents, said the company as it announced its results for the six months to June 30 on Tuesday.
Derwent swung to a first-half pre-tax loss of £14m, from a pre-tax profit of £130m in the same period a year earlier. The loss came as the value Derwent’s £5.4bn portfolio was revised downwards by £68.3m by property group CBRE, having increased £75m in the same period of 2019. Despite the loss, the company increased its interim dividend by 4.8 per cent, to 22 pence a share.
Office occupancy levels on the company’s estate was roughly 15 per cent, according to Mr Williams, who does not anticipate workplaces getting beyond 50 per cent of capacity in the next two or three months.
While there was demand for new space, including from the likes of Netflix and law firm Slaughter and May, occupiers’ priorities have shifted, said Mr Williams. “They are saying they want more space available: less hot-desking, less packing [people in], less sedentary desk space; more collaborative space,” he added.
Paul Gold, cofounder of office leasing company Hedge Real Estate, said that rather than hitting all rents equally, coronavirus was likely to create a two-tier office market in the capital. Companies that have taken on long-leases in the past few years would sub-let them to others, often at a heavy discount, he said.
“That’s where the big supply line is going to come from. It will be much cheaper than any operator. All [the businesses] want to do is ditch it. That inevitably will affect the market,” said Mr Gold.
Derwent was also hit by lower than normal rent collection, suffering a roughly 20 per cent shortfall for the months since coronavirus hit the UK.
The company is considering changing the terms of some its leases with restaurants and retailers — which make up less than 10 per cent of Derwent’s portfolio — to allow tenants to pay rent based on what they earn, rather than as a fixed cost. So-called turnover leases are increasingly being considered by landlords looking to support hard-hit businesses through the crisis.
Derwent also announced the departure of Simon Silver, one of its co-founders, who will retire in February 2021.