Standfirst

Few big money players in the office property market get bigger than the £984 billion portfolio of Legal & General Investment Management. In an exclusive conversation with Mix, their business space development boss explains why Brexit matters, but happy office occupiers matters more. David Thame reports.

Proximity to money – serious money – has a distorting effect. Things just look different when you’ve millions, or billions, riding on what happens next. The seriously rich live in a world of worry and anxiety most of us know nothing about because, quite literally, it is not worth us bothering. And in no walk of life is this more obvious than that of commercial property.

The basic rule of thumb in the property world is this: the closer they are to real money, the more likely they are to appreciate the downside. Cheery Joe, the office broker, may see nothing but blue skies as he jostles you into leasing another 10,000 sq ft of floorspace. At the same time, Sober Samantha, the asset manager, who owns the office building on behalf of her pension fund clients, worries that it’s all too good to last and wants to hedge their bets, because her aim is not so much jam today as jam tomorrow and the day after tomorrow.

Talk to the big investors, particularly UK-based institutional investors whose mandate is to play safe in the search for long-term income, and today’s office market begins to seem different. From their elevated viewpoint, way above the leasing scene, today’s ups and downs are barely visible whilst longer-term opportunities (and risks) stand out like the Alps.

Simon Wilkes is Head of Business Space Development at Legal & General Investment Management (LGIM). They manage an investment portfolio of £984 billion, including the new government regional offices created under a £1 billion funding deal assembled during the last 12 months. In other words, LGIM see the world through the lens of enormous amounts of (mostly) other people’s wealth.

From his desk in London EC2 he sees an office market with a long-term opportunity to make office occupiers a lot happier (and hence a lot happier to stay put in their offices and pay higher rents). But the clear downside risk is Brexit.

So first the good news. Investors like Wilkes really believe in the wellness and amenity agenda, and intend to make it work.

‘The biggest focus for us it to create office environments that are better places to work, more flexible, and with the prospect of better work/life balance, which traditionally landlords have not done,’ Simon says.

‘It makes sense because it means better rents, quicker leasing, and the greater likelihood that we will retain the tenants if they are happier. Now that is difficult to prove statistically, but what we hear from occupiers is that getting these things right is key to them retaining staff. For them, it is all about what the building offers, from paper storage to bike storage.

‘A lot of occupiers really focus on this, it’s a factor they are taking into account, so it’s a factor we are taking into account.’

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This means instructing asset managers to make buildings open, flexible and transparent. They have to create bigger shared spaces, light and airy entrances, and gardens, where it can be done (LGIM have experimented with gardens in Southwark and at 245 Hammersmith Road, London). 

‘Buildings have to be more inspiring places,’ is Simon’s up-sum of their aim.

Which raises another issue: if an office building is to include a tempting range of amenities, and still make a decent return for the investors, then the ratio of net to gross floorspace can’t be adjusted too dramatically. To make the sums work, you still need a lot of office floorspace, and the easiest way to do that is to build big buildings where losing a few thousand sq ft for a bike store or a coffee bar is not going to be a big deal.

Simon plays down the idea that big-is-best when you follow the wellness and amenity agenda. ‘It doesn’t always follow that you need bigger buildings,’ he says. ‘Look at the Lewis Building in Birmingham, which is 110,000 sq ft, where we were able to fit a library and a shared workspace in the reception area. And look at 120 Aldersgate in London, where we put meaningful facilities into a small space.’

Even so, the exceptions prove the rule: big probably is better for the UK’s funds. Big buildings in city centres are particularly favoured, but if Simon is any guide, the resurgent out-of-town office market does not excite them. Perhaps they can see past the current vogue to a longer-term problem, because, as Simon explains: ‘We have some out-of-town sites, but the problem is cars, which obviously these sites require, and our agenda is all about wanting to be more sustainable.’ So a warning there for developers and agents currently riding the out-of-town business park wave.

And how do the funds feel about the UK’s regional cities? Enthusiastic is the answer. Not only has LGIM bought heavily into the Government’s efforts to establish major centres in the big regional cities, but they also see the regions as a safe place to stash the cash, and a long-term growth prospect.

The ‘safe place’ appeal of UK regional cities is at the front of Simon’s mind because – as Mix goes to press – Brexit negotiations appear to be reaching a chaotic climax. Chaos is exactly what long-term investors do not like.

‘The bigger danger to the office market has got to be the unknowns of Brexit,’ Simon fears. ‘Probably the London office market is more vulnerable than the regions, but it all depends what the terms of Brexit are.

‘In the circumstances, we are not inclined to sit on our hands, but we are a bit more cautious because we are aware of office requirements in London, where the occupier wants to agree terms but will not sign the lease until after Brexit is agreed. There are two or three cases like that, it is not yet common, but we’re watching how it develops.’

The best way to judge an investor is, perhaps, to watch what they do with their money: today LGIM are offloading one of their prime Birmingham assets with a £136 million sale of the 237,000 sq ft Lewis Building and neighbouring Priory Court. The properties are a stones’ throw from what will be Birmingham’s new HS2 station at Curzon Street when (and if) the high speed line is completed in 2026. 

The sale suggests mighty LGIM see this is a good moment to take a profit on their investment – and by extension a good moment to plan for the future. And that is wisdom that even the smallest of low-value small fry could agree with.

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