Banks stall on property strategy as doubts abound

LONDON Fri Nov 5, 2010 1:23pm GMT

Related Topics

Quotes

   

LONDON (Reuters) - Backsliding performances and constant threats of break-up by regulators are forcing banks to rethink their property usage strategies, stoking fears of an office oversupply in Europe's key business hubs from 2014.

"Banks are trying to do all they can to avoid taking on new lease commitments while the outlook for their revenues remains hard to call," said Matthew Pullen, CB Richard Ellis' CBRE.L (CBG.N) head of global corporate services EMEA.

Banks around the world have posted mixed third-quarter results, with large profits at JP Morgan (JPM.N) and Goldman Sachs (GS.N) thrown into relief by losses at Deutsche Bank (DBKGn.DE) and Bank of America (BAC.N).

For prime office developers such as Land Securities (LAND.L) and British Land (BLND.L), uncertain lease demand from banks, some of their largest clients, poses a risk, given they have just kick-started speculative projects without pre-lets.

Some property consultants say banks are already delaying and even reversing their bullish plans to expand into new space in the short- to medium-term, as their growth prospects fade on the back of reduced economic stimulus and huge public spending cuts.

"We've had two quarters of all the banks saying to us that investment banking is going to see demand growth of 10 percent per year over the next three years, but from about July onwards, that has completely shut up shop," said James Maddock, head of global corporate services at DTZ DTZ.L.

In central London, bluechip banks, such as HSBC (HSBA.L) and Barclays Capital (BARC.L), are using all available floor space in their current buildings, a practise known as "max-packing".

To make more efficient use of space, Citigroup has sublet floor space in its tower at London's Canary Wharf financial hub since 2008, and now occupies less than half the 45-floor building, said Rupert Perkins, a partner at property consultancy King Sturge. JP Morgan is undecided on whether to develop its planned $3 billion headquarters at Canary Wharf.

"My understanding is JP Morgan doesn't intend to make a decision this year," said Perkins, noting the Wall Street bank is also pondering whether to rent the former Lehman Brothers' building in Canary Wharf, or remain in its existing properties.

BALANCE OF POWER

Until revenues rebound and the bank break-up threat fades, prime office developers will have a nervous wait to see if demand from that tenant base -- equating to about 40 percent of London office demand -- will recover in time to fill the slew of planned skyscraper projects.

Data from consultant Jones Lang LaSalle (JLL.N) shows about 3.2 million square feet of speculative office development is due to be delivered between 2011 and 2013, adding to the 1.6 million sq ft of space completed in the first nine months of 2010.

This return to speculative development marks a shift from the outlook in May, when jittery lenders and hefty margins on prime London office construction finance were seen stunting speculative developments until 2014.

If demand does rise, landlords may be have to accept rental commitments far shorter than the typical 25-year lease, common in the City just five years ago, several property brokers said.

In October, HSBC signed a five-year lease for 88,000 sq ft of offices, with the option to break the lease after one year.

A similar trend exists in Europe, with more German banks seeking shorter leases due to doubts over ongoing consolidation, said Marco Malluci, a director at Savills (SVS.L) Frankfurt.

"In Frankfurt the banks are still working on consolidating their space," Malluci told Reuters.

Land Securities' chief, Francis Salway, said banks featured on a list of prospective tenants mulling leases at its newly finished One New Change scheme in central London.

"Demand is coming from a real range of clients ... the people you would naturally expect to be in the City, either directly financial services or supporting financial services. We are seeing demand from banks," Salway said.

The most bullish brokers expect London office rents to rise up to 25 percent this year, due to a lack of new supply, but this trend does not extend beyond the capital.

Developers are also drawing comfort from the fact that some financial sector tenants are now at least replacing expiring leases rather than disposing of properties after two years of lay-offs, boosting rents in some cities.

However, until Western banks are more secure in their future structures and headcounts, developers may need to seek other sources of demand, including a string of Asian banks keen to move to and chase business in credit-starved Britain.

"Within the last year, there has been a sudden influx of nine major Chinese banks all taking or about to commit to new premises in the traditional City of London core," Nomura analyst Mike Prew said.

(Editing by Andrew Macdonald)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.