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Making room for east lenders

News that HSBC, one of the world’s top ten banks, may move itsor the type of property that only Canary Wharf can offer. The Square Mile will have to adapt – or find a different kind of tenant. operations to a purpose-built new property development in Canary Wharf in London’s Docklands has sent a flutter of fear round City of London developers and landlords. The bank plans to develop a £500m, 41-storey tower to house staff currently located in offices scattered throughout the Square Mile.

Announcement of the move provoked a rear-guard action to keep HSBC in the Square Mile. Geoffrey Bradman’s Rosehaugh, one of the companies behind the massive City Broadgate development, was said to be in a “last-ditch bid” to keep HSBC in the City. And there were murmurings of criticism that the City of London Corporation should have taken more decisive action to provide more planning permissions for the massive property developments that the largest banks and professional services companies now require.

If HSBC confirms its decision to move to Canary Wharf – on a site just north-east of One Canada Square – it will be a significant tactical victory for Docklands. Canary Wharf, built in what was one of London’s most run down areas, has put its troubled early days behind it and attracted many top-flight tenants, chiefly from the financial services industry. Yet, so far, the burgeoning development has barely dented the City’s supremacy.

With the economy – and financial services especially – booming, both the City and Docklands are winners.

But times are a-changing and some leading property commentators suggest that the City will have to change dramatically in the next few years if it is to continue to meet the property requirements of its traditional financial services and supporting businesses. Fascinatingly, the changes in the City’s property portfolio reveal much about what working life will be like in the Square Mile in the early years of the next millennium.

Helen Morris, senior researcher at property consultants King Sturge & Co, reckons that in the next 10 years companies will need less City office space per employee, but of higher quality. “Business pressures will polarise City firms – and hence their property requirements – into the very large and the very small,” she says.

What seems to be happening is that the demand for office space is ‘hollowing out’ with the result that existing large – but not large enough – offices are falling out of favour. The two key drivers behind all of this are the wave of mergers in financial and professional services companies and radical changes in working practices.

The mergers are creating fewer but larger companies. For example, in the last three years major banking mergers include Bank of Ireland-Bristol & West, Chemical Bank-Chase Manhattan, ING-Barings and Merrill Lynch-Smith New Court. In insurance, there were mergers between, among others, Liverpool Friendly-Frizzell Group, Swiss Re-Mercantile & General, Royal Insurance-Sun Alliance and Prudential-Scottish Amicable.

Among professional service, law firm Cameron Markby Hewitt has merged with McKenna & Co and Nabarro Nathanson with Turner Kenneth Brown. The largest of the recent spate of financial and professional services mergers is between accountants Coopers & Lybrand and Price Waterhouse. Moreover, everybody expects the wave of mergers to continue, spurred by the development of Emu and firms’ need to develop ‘global reach’.

The fall-out on the property market is that the merged companies need larger property. Traditionally, as the projected HSBC move suggests, this should favour Docklands. “One of the main reasons for moving to Canary Wharf has historically not been cost but size,” notes John Forrester, head of DTZ Debenham Thorpe’s central London office agency. “It has been difficult to achieve the size for big financial businesses in the City or West End but it is actually achievable in Canary Wharf.”

Suddenly, with companies wanting larger and larger offices, the City’s history has looked like a handicap rather than a helping hand. “It is very hard to replicate very large premises in areas that are dominated by conservation, by listed buildings, by parks and by sight and height lines,” says Forrester. Indeed, a recent recommendation by the London Planning Advisory Committee that the City is not suitable for skyscraper-like developments, such as that planned by HSBC, seems to confirm that creating large purpose-built offices in the City will become even more difficult in the future.

And yet the City is fighting back. In the last few months, global players including Merrill Lynch, Goldman Sachs, Rothchilds, Swiss Re, Westdeustche Landesbank and Andersen Consulting have all announced major “pre-lets” – effectively agreeing to take space before it is built or converted.

Merrill Lynch has actually reversed the drift to Docklands by taking the huge former Post Office site in Newgate Street. Goldman Sachs is taking the old Daily Express building, now Fleet Street Square, in a 330,000 sq ft deal. So the City can still pull in the big names and the big deals. The key question is how long it will be able to do so without more major redevelopment.

Other forces are likely to change the demand for property both in the City and Docklands. One of these is the move towards more flexible working.

In the City and Docklands, cynics interpret this as a move towards longer hours. Certainly, many in financial trading can be found at their desks by 6am and most won’t head for home until after 7pm. But in many other firms, especially professional services such as accountancy or law, more employers increasingly choose their own hours.

Allied to this is another phenomenon called ‘hot desking’, which is sometimes found where employees spend part of their time out of the office – perhaps at clients’ sites or working from home. Instead of having their own office desk, they share working space with others. Both these trends, Morris points out, reduce the amount of office space each employee requires.

The problem for firms trying to plan how much space they will need in the future is that it is not clear how much space your average white-collar worker in the City occupies at the moment. One study by the Department of Employment suggested average employment density for London is 17.7m2 per worker.

Morris estimates that most City workers use between 25m2 and 37m2 of office space each. This partly reflects the state of the property market – space per employee grows when the office market is weakest because it generally costs less and, partly, because if the economy is depressed there tend to be fewer workers in each office. The trends above suggest that the figures might fall over the next few years.

But don’t be too sure. To set against savings from shared space, there are other factors. For example, high-flying City and Docklands employees expect only the best facilities at work. No self-respecting major professional services firm is complete without its gym and staff restaurant. And there is a steady demand for creches. They all take up space that would otherwise have been saved.

The growth in teleworking – working from home for all or part of the time using computer and communications technologies – does not seem to help City and Docklands-based firms much. Although there are now an estimated 1.7 million employees throughout the UK who spend at least part of their time teleworking, much of the work in the City – in trading rooms, for example – can only be done on site. With past scandals in mind, no self-respecting bank is going to suggest options traders work from home.

There is also another unexpected factor at work. A few years ago, it was all the rage to split the functions of a bank or investment company into front and back-office tasks and locate them in different places.

Typically, the front-office would have been in the City or Docklands and the back-office somewhere else – perhaps south of the river where property is normally cheaper. That trend seems to have gone into sharp reverse.

Indeed, the demand by firms such as HSBC, Merrill Lynch and Goldman Sachs for new super-large premises is largely driven by the desire to bring the disparate parts of their organisations together in one building. A desire to be one big happy family? “More a need for improved internal communications and face-to-face contact,” says Dan Cowton, senior analyst at property consultants Knight Frank.

It seems that more of these companies are recognising the limitations of e-mails and other communications technologies and the potential power of pressing the flesh and the human touch. There are also economies of scale when providing the kind of high-quality accommodation that staff working for a global financial or professional service firm expect.

For the FD hoping to make savings on the rent, all this makes fairly gloomy reading. Knight Frank’s comprehensive quarterly survey saw headline City rents rising 12% in 1997 to £47.50/sq ft . Some pay even more. When Robert Fleming concluded a pre-let on Barrington House in Gresham Street towards the end of 1997, it paid £50/sq ft – but extracted a rent-free 24-month period on a 25.5 year lease. More recently, US-based finance house Donaldson, Lufkin and Jenrette looks set to sign a deal for an Old Broad Street site at a rate of £52.50/sq ft.

It is certainly cheaper in Docklands. Outside Canary Wharf, headline rents were £10/sq ft, up 11% on the year. But even here, rents are likely to rise in the future, especially as transport links to other parts of Docklands, such as the East India Dock, will improve when the Jubilee underground line extension opens.

With property availability in both the City and Docklands tighter than it has been for years, most companies have to take what they can find.

It is the landlords who are laughing. Another property slump, similar to the one that wreaked so much havoc in 1990-92, could wipe the smile off their faces. But that slump was largely caused by over-supply triggered by gung-ho investment plans in the heady Lawson years of the 1980s. Property developers are too canny to let that happen again.

What could knock them sideways would be a slump in financial markets.

At the moment that seems a fairly distant prospect. But an unhappy combination of events – the euro going wrong, a further slump in the Far East, a slide in world stockmarkets, currency mayhem – could plunge the property market back into gloom. Forrester admits the market is sensitive to a downturn in the economy.

If that happened, the game of one-upmanship between the City and Docklands would soon be replaced by a scramble for survival. But, for the time being, both are looking forward to more good times.

The City becomes a community

Picture this scene. You leave your office on a summer’s evening and stroll to the local wine bar. As you amble through the streets, you see shoppers browsing in the boutiques and speciality stores. Gourmets are selecting their meal in a Michelin-rosetted restaurant. Local residents wave cheerily from the balcony of their flat. Children frolic in a playground.

Every prospect pleases.

A pleasant country town? No, this could be the City of London in less than 10 years’ time, according to one vision of the future. Helen Morris, senior researcher at property consultants King Sturge & Co believes the City will have a much more varied development in the years ahead.

There was a time, not much more than 10 or 15 years ago, when after about 7pm the majority of Square Mile made a ghost town look positively lively by comparison. Now there are more pubs and restaurants that stay open later. And Morris believes there will be more retail developments, even a department store such as John Lewis before long. There are also planning permissions for a few hotels which will help to keep tourists out and about in the City after the sun has gone down.

“There are people who talk about the City becoming a village again,” says Morris. “I don’t think we will quite see that but I do think it could become a more civilised sort of place.”

Useful further reading: Futures…Options: the City Office Market. Available from King Sturge & Co, (0171) 493 4933.

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