In the best news for the London office market in two years, Japanese bank Nomura is to rent the new 525,000 sq ft Watermark Place, moving from Canary Wharf next September. The deal is believed to be the largest in terms of space for a completed building in the City of London.
Quite rightly the deal has been accompanied by a fanfare of positive notes from those interested in letting office space. Whether it really represents a turning point remains to be seen but it does give an insight into the damage to rents wreaked by the downturn.
The Nomura transaction is reported at £40 per square foot, with upward-only five-year rent reviews. Headline office rents across the UK reached a cyclical peak at the end of 2007 with the City reaching around £65 per square foot. At £40, Watermark Place appears to crystallise a fall of some 42% in the intervening period.
But the damage doesn’t end there. Nomura secured a rent free period of just over 4 years, worth nearly £90 million pounds and bringing the effective rent over a ten year lease down to £23 per square foot. The landlord’s pill is sweetened somewhat in that Nomura will pay for the fit out. With banks paying some £85 per square foot for a top end fit out this adds roughly £8.50 to the rent, giving an estimated effective rent of £31.50 per square foot for a top specification, brand new building on the river in the heart of the City of London.
The difference between headline and effective rents has always been an issue. Research by RREEF shows that, while prime headline rents rose by 110% and 50% in the periods 1994-2001 and 2005-2008 respectively, effective rents rose 192% and 85% in the same period due to the contraction of rent free periods.
The average gap between the effective and headline rents has been around 17% since 1993 with only limited periods existing around the top of the market cycle when the net effective rent exceeds 90% of the headline.
Net effective rents on a prime ten year lease in the City of London dipped below £30 per square foot in Q2 2009, the first time this mark has been breached since Q4 1995. Currently, the average rent free period is about 33 months. In this context the Nomura deal looks to suit all parties.
The landlords get a good deal - although they are giving away 51 months rent free or £32 million they are losing fit out costs of around £45 million. Nomura get a very long rent free period, enabling an orderly move from Docklands and the market is happily reporting rents at £40 per square foot.
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