The news that London’s Canary Wharf financial district is losing both global banking giant HSBC and Clifford Chance, one of the world’s largest law firms, is further evidence that changing working patterns are making businesses think twice about their office needs and costs.
Only weeks before, the area’s 5 Churchill Place, a 313,000 sq. ft block, fell into administration. The sign of removal vans only bodes ill for investors in the capital’s commercial property market. Monday to Friday office occupancy across the UK is estimated to be below 30% at present and slightly less in London. Post-pandemic, about 40% of UK working adults work from home at least one day a week, according to the Office for National Statistics, compared with 12% before 2020.
There are clearly local factors affecting Canary Wharf, where more than 15% of offices are empty – a higher figure than in the City and more than twice the level of the West End. Despite extensive retail and dining in the docklands, as well as fast links to central London, hybrid working financial types have simply gone off the area.
Looking further afield, half of large multinationals plan to cut space in the next three years. Those already locked into agreements just have to accept the workplace will be quieter and possibly empty on Fridays. However, the more immediate danger in the market lies in financing.
Ever-higher interest rates are impacting costs for developers. The appetite for lending against commercial property as a whole, not just offices, is shrinking and the outlook for commercial property values – which seemed to have shown signs of stabilising earlier this year – isn’t promising. Yields will need to rise further to satisfy investors: either the rent being paid needs to go up, or the value of the property has to go down, or a bit of both.
While Asian investors are still interested in big (£100m+) central London deals, greater risk for investor-owners and banks may lie regionally: large foreign buyers are scarce; tenants’ businesses are failing because of rising staff and energy costs, while revenues are squeezed by broader demand factors; and sectors such as ‘physical’ retail, hospitality and light industrial show few signs of recovery.
Needless to say, all stakeholders in the fragile UK commercial property market need to stay ahead of the game with early negotiation on refinancing and taking pre-emptive action on the future of their company structures. The restructuring and insolvency toolbox is large and deep for those in need of a creative approach to ensure business longevity.
Written by Bea Vakharia, Analyst at Buchler Phillips, a UK based independent boutique firm with an impeccable Mayfair heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.