London Games creates hurdles for building offices in the City

The spiralling cost of construction in the lead-up to the Olympic Games in London in 2012 is undermining City office development deals, a report will reveal today.

A shortage of skilled labour, soaring prices of raw materials and a growing number of Olympics-related projects have given the building industry huge bargaining power over developers in the pricing of new schemes in the capital.

Building cost estimates have risen by about 25 per cent over the past year. The surge in costs, coupled with the recent credit crunch from banks, has turned the City office investment market into a virtual dead zone since the end of July, with little prospect of improvement until the new year, according to Cushman & Wakefield, a commercial property agency.

A total of £5.4 billion was spent on buying City office space in the third quarter of this year. While that represented an 8 per cent rise on investment in the previous quarter and 14 per cent more than the same period a year ago, all but about £350 million of deals took place before the start of August, Cushman’s figures reveal.

Since August, banks have tightened their lending criteria and are demanding far more upfront cash from potential investors – or they are not lending at all.

Meanwhile, the cost of building the foundations and shell for a City office block has risen from about £200 per square foot last September to £270 for a normal structure and up to £300 for the tallest skyscrapers, Bill Tyser, head of Cushman’s City investment team, calculates. Four years ago build costs would have been about £170 to £180 per square foot.

“People like to fix costs upfront and they are not being able to do so. The issue at the moment is that we are in a period where investors can’t get liquidity in the financial markets, so a lot of structured deals are not happening,” Mr Tyser said.

“What started this year off was a huge rise in the price of cladding and steel formation due to demand from China and India. Now we are beginning to see the impact of the Olympics building up. A lot of contractors are in command about what they want to do. Many are saying: ‘I do not want to do that – a City scheme – as I want to be in the frame for East London.’ So there have been really big build-cost jumps this year.”

City skyscraper projects with planning but still yet to get off the ground include Land Securities’ 20 Fenchurch Street, a 37-storey project rising to 160m (525ft) and dubbed the “Walkie Talkie” due to its concave shape. No decision will be made until next spring on a starting date for the building, including whether to construct speculatively, without a tenant lined up, or with a prelet in place, a senior company source told The Times.

Meanwhile, plans to build The Pinnacle, a 288m City skyscraper dubbed the “Helter Skelter” because of its twisted shape, still depend on securing the last slice of development finance. The site’s owner, an Arab Investments-backed offshore company, has been in talks for nearly a month to sign a definitive fixed-price construction contract with Multiplex, the company behind the delayed and overbudget Wembley stadium. It is understood that Khalis Affara, the managing director of Arab Investments, has signed only a heads of agreement with Multiplex, but a full contract is needed before the final construction funding falls into place. Construction is due to start early next year, with completion in 2009.

A start date has yet to be fixed for construction of New London Bridge House – in what will be London’s tallest tower at 310m – after the backers for the scheme, dubbed the “Shard of Glass”, confirmed this month that they were struggling to secure development finance. Talks are under way for a new investor, possibly the state of Qatar, to buy a one-third equity stake from Simon Halabi, the tycoon, while Credit Suisse is on standby to provide new finance.

The only significant Central London office deal to take place since August has been the £240 million sale by Legal & General of its Bucklersbury House site between Cannon Street and Bank stations, which in 2013 is destined to become Walbrook Square, the City’s largest new office and shops scheme in 25 years.

Questions have already been raised in the City over how the eventual buyer of the scheme, Metrovacesa, of Spain, will make a profitable return. Among those who balked at the prices needed to make it through to the final round of bids were Canary Wharf, the docklands developer.

Metrovacesa shot to prominence this year when it paid £1.1 billion for HSBC’s Canary Wharf headquarters, representing an initial yield - return from rent compared to price paid – of just under 4 per cent. Average City office yields have since shifted from about 4.5 per cent to 5 per cent, over fears of price falls.
source: business.timesonline.co.uk

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