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News Release

London

Lack of Grade A office development creates opportunities for Grade B space

Jones Lang LaSalle reveals strategies for investment outperformance


London, 25th May 2010 – Jones Lang LaSalle reveals a growing opportunity for Grade B office space to be refurbished and repositioned as Grade A to bridge the ever increasing supply gap in the office market.

James Morris, Head of Jones Lang LaSalle’s Project & Development Services team, said: “The arrival of the credit crunch and subsequent global recession led to the brakes being firmly applied to speculative development.  There was no development finance, no developer or market confidence, little tenant demand and development appraisals were unviable.  As a result, there is now an imminent supply gap of Grade A office product in London.  If the market does not respond, this shortage is likely to become very severe by 2012.”
 
James added: “Upgrading Grade B product to Grade A standard seems a logical, relatively low risk opportunity to bridge this supply gap before new build developments reach completion.  Grade A rents look likely to outperform prime after 2012 in London as the differentials between the two narrow.  This strategy therefore offers investment outperformance opportunities.”

James continued: “If investors are seeking product to adopt this strategy, they need to firstly consider which assets are most appropriate for refurbishment.  Not all buildings will offer a sufficient base specification to be truly Grade A standard post-refurbishment. Developers seeking to identify opportunities should consider:

Location: To be competitive, a central location is paramount. In certain markets a micro location will make a considerable difference.

Floorplates: These need to be divisible, “clean” with good floor to ceiling heights, natural light and allowing for natural ventilation. Assuming a 100,000 sq ft building, floors of 10,000 sq ft would enable contiguous lettings in multiples of 10,000 sq ft but also divisibility to “60/40” to capture the smaller market churn.

Lifts & Cores: While the lifts themselves may be replaced it is imperative to ensure proper servicing for the building is possible by having the necessary number of lift shafts and service risers.

Age and tenure: A modern structure (1980s+) is more likely to offer the necessary flexibility and load handling. A freehold will also facilitate the planning and build process.
Cladding & windows: If no works are required on these the time savings will be considerable.

Planning: Planning permissions are becoming tighter and this will have an impact on cost, timing and standards. Regulations are even tighter with objectives significantly higher for new build.”

James added; “Refurbishment is quicker than most new development and in the majority of cases at a lower financial risk. As the BCO 2009 “Can Do” refurbishment guide emphasises, it can also restrict onerous S106 requirements. It also enables car parking ratios to be maintained – not the most environmentally sustainable of criteria but something occupiers are content to have if offered.  Investors should therefore undertake a strategic assessment of their portfolios so that decisions can be taken relating to the upgrading of outdated and inefficient space or the potential disposal of assets.”
 
Jones Lang LaSalle’s research highlights that having decided which assets to refurbish, investors should explore different options in line with budgets.  The British Council for Offices (BCO) Specification Guide is commonly used as a benchmark.  The biggest change in the latest guide is the emphasis on sustainability which is integral to any improvement or development works and crucial for future proofing.  While an extensive refurbishment involving replacement or relocation of plant carries greater expense and risk, it offers the best opportunity for investors to capitalise on any improvements to asset value and the BCO calculates that even the most extensive refurbishment carries a 14% cost discount to new build - as well as a 14% time saving.
 
James concluded: “The pattern of lease breaks and expiries, or an occupier’s preference to remain in-situ, has often dictated that refurbishments are carried out on a floor by floor basis.  Refurbishing a building whilst it is occupied, however, presents a number of challenges. If central plant machinery such as heating and cooling systems need to be replaced, investors must consider the cost of maintaining temporary facilities while the building is in operation.  Investors should engage fully with tenants to ensure they are not unduly disrupted.  This may necessitate refurbishment works being carried out during out of office hours resulting in additional costs and time, although this is often not possible in Central London.  The main benefit of this approach is that landlords are able to maintain rental income throughout the refurbishment process and occupiers may not be required to vacate but move internally.”