Foreword
Written by
William Beardmore-Gray
Head of London Offices
A decade of change lies ahead of London, a city that has been proven to thrive on the opportunities created by transformation
Ten years ago, in February 2009, I stood up to speak at our Central London Breakfast, convinced I had been handed a poisoned chalice. The preceding months had seen a raft of once mighty banks tumble like dominoes and most commentators were talking about a “lost decade”. The outlook for London was bleak. The intervening years have contained some events that matched those dark expectations – the euro crisis, rollercoaster financial markets and the rise of populist politics. Yet, for the most part, our worst fears in 2009 were not realised. A digital revolution has transformed London’s economy with tech disruption changing everything from how we hail a taxi to how we occupy offices. A truly global market for real estate means Knight Frank’s investment agents are now far more familiar with the airport terminals of Asia than was the case in 2007. A key feature of the last decade has been unsettling change. It is, however, change that has paid dividends for those agile enough to adapt. London has proved particularly adept at transforming itself to meet the demands of the new era and the benefits are evident in the office market. Of the 22 London office sub-markets we monitor, 14 have prime rents that are higher today than in 2007. Three sub-markets have been added to our definition of Central London since 2007 – Nine Elms, Stratford and White City. This year’s London Report looks at why this great city is so adaptable and examines the next wave of changes to come. We forecast further transformation in the pipeline, with London set to become a centre of scientific R&D, drawing capital from investors unknown to the market before and extending its reach into yet more sub-markets. What is certain is that the next ten years of change will create new opportunities in the London real estate market.
At Circus West Village, Battersea Power Station
PAGE / one
COntents
11
What are the trends that will shape residential development over the next five years?
As traditional industries are reshaped by technology, new sources of demand emerge
Five trends will shape the quantum and qualities of occupational demand in the London market over the next three years
While the politicians continue to squabble over Brexit, the capital’s economy is guaranteeing its future growth through diversification
The appliance of science
A design for life
What next? Four future features of the London marke
London’s new occupational orthodoxy
INVESTMENT CAPITAL
London’s Economy: future-proofed
time after time
executive summary
PAGE / two
12
10
London is a perennial hub in the global economy, with a track record of weathering adversity
The London Report 2019
Scientific R&D is urbanising, with London well placed to capture growing demand from the life sciences sector
How buildings and services should respond to changing occupier expectations
Despite political uncertainties, London retains international investor appeal
future gazing
04
Derivative Demand
05
06
07
08
09
EXECUTIVE SUMMARY
• • • • •
New dynamics in residential development
“Current events will not break London's longstanding track record of responding positively and progressively to seemingly seismic events”
Substantial demand from next wave technology
The UK has a strong global standing as a centre for the advancement of next wave technologies such as AI, automation, robotics and life sciences. London is home to many companies at the heart of next wave technology. They are joined by the tech titans who will continue to scale up, invest and develop new technologies – and will access London’s talent pool to do so. As these next wave technologies are applied to traditional industry sectors, they serve to alter business models and structures. This will create new occupational requirements from banks, lawyers, professional service firms and beyond. Disruption will continue to create demand. London has, in recent years, developed a globally significant position in hybrid sectors such as legaltech or fintech. These are increasingly a source of high growth and well capitalised companies that are seeking to develop scale within London. As technology is applied to the life sciences sector, both to generate hybrid sectors such as medtech or enable computational-based R&D for pharmaceutical firms, science in the city becomes a reality, as evidenced by Novartis’ recently announced move to White City. London’s life sciences ecosystem and infrastructure is unrivalled, and this will support increased demand from the sector.
• • • • •
What next? Four future features of the London market
Occupiers are using the workplace to support, facilitate or portray strategic transformation and to attract and retain talent that can drive that transformation. Consequently, there has been a clear flight to quality in the London office market. Amenity-rich offices and office locations will outperform going forward, as they provide occupiers with not just a physical product but a strong business solution. Amenity provision in London office buildings will extend beyond those that support physical well-being, such as gyms and end of trip facilities. Next phase amenities will provide staff education and development opportunities, offer lifestyle support for a more diverse workforce, and also create spaces that support the mental wellbeing of staff. Amenity-rich spaces will provide a positive and productive workplace experience for staff and ensure that costly staff churn is reduced. The cost of occupying an amenity-rich building will be offset by this increase in retention. The continued globalisation of investment and development in the London market will bring further international best-practice and innovation to the city's built stock.
Supply rich in amenity and experience
• • • • •
A deep and diverse pool of investors
London’s position as one of the world’s most liquid and transparent real estate markets will remain alluring for global and domestic investors alike. London’s value relative to other capital cities, the prospects for rental growth, and the potential for lower growth and rising volatility in emerging markets will drive increased capital flows towards London. The source of this capital is evolving. This year we highlight rising interest from investors in Australia and Israel, for example, in addition to persistent demand from Asia, Europe and North America. Longer term, we expect that overseas investors will play an increasing role in development activity in order to access higher returns. They already account for over 40% of the current pipeline. We anticipate growth in debt funds, and see appetite to lend on income-producing assets from a variety of sources, including domestic insurance companies, German lenders and, increasingly, institutions from the Far East.
• • • • •
The search for affordable housing will continue to shape new housing delivery, in terms of design, use of space and the expansion of offering in the rented sector. Increased transport infrastructure linking London to other urban centres will change the dynamics of some development decisions as businesses and workers place weigh up connectivity and affordability. Housing is set to become more age-focused. No longer just about the number of bedrooms, housing will be targeted by need, from student housing, via co-living, renting and buying, to senior living. Placemaking and the experience of buildings will become ever more important, in order to better connect people to their home, and each other. In the era of rising development costs, developers are seeing the opportunity to streamline and speed up development using modular construction.
PAGE / three
“What next?” has, understandably, been a prevalent question in the bars, homes and offices of London over the last two-and-a-half years. Concerns about the direction and future global standing of the UK following the EU referendum in June 2016, and the seemingly locked political process that has ensued in trying to deliver on its result, have weighed down business and consumer sentiment. This has not, however, translated into reduced market performance. Far from it. In 2018, London saw greater volumes of commercial real estate investment than any other global city at £16 billion. Similarly, 14.8 million sq ft was let in the London office market in 2018, the highest level since 2014 and 15% above the long-term average. Despite difficult sentiment, London continues to attract the interest of occupiers and investors alike. While there are doubtless numerous twists and turns awaiting in the political process, we remain confident about London's future as a city and real estate market of global significance. Current events will not break London’s long-standing track record of responding positively and progressively to seemingly seismic events. As this report notes, there are four features that will serve to underpin the continued strength of the London office market.
“The capital has defied the pundits before, and evidence is mounting that it is doing so again”
1986
London is a perennial hub in the global economy, with a track record of weathering adversity
The vote to leave the EU in 2016 prompted a fresh wave of prophecies that London would go into decline as a global city. But the capital has defied the pundits before, and evidence is mounting that it is doing so again. London has weathered the late 1980s stock market crash, the ERM crisis of the early 1990s, the dotcom bubble of 2000 – and moved on to greater things. Commentators have many times over the decades predicted an exodus of companies and jobs to Birmingham, Dubai, Dublin, Frankfurt, Hong Kong and New York. Inevitably, of course, some jobs have indeed left to these cities, but the numbers were overshadowed by further growth. London’s workforce currently stands at a record high. Two-and-a-half years after the vote for Brexit, major tech firms and financial institutions have reconfirmed their commitment to London by acquiring new headquarters here. Just a handful of financial jobs have been moved out due to Brexit, not the tens of thousands originally predicted. More tower buildings are rising above the city and are steadily letting up.
Chief Economist
Interest rates rise as property prices crash
The Jubilee Line opens new connections in London
The pound crashes out of the ERM
Moves to Canary Wharf:
2016
The Big Bang – the Stock Market deregulates
2009
HSBC 2002-2003
30 St Mary Axe marks the birth of the tower cluster
2007
Global banks in crisis
2002-2003
Construction begins on Crossrail
1992
London goes for gold at the Olympics
1999
Britain votes for Brexit
Written by
PAGE / Five
James Roberts
time after time
The business world likes hubs, whether it be telecoms confluence points, the epicentre of vast commuter rail networks or globally connected airports. London has, albeit in an uphill struggle against political agendas, maintained its infrastructure to an international standard. The green light for Heathrow’s next phase will underwrite future growth, sitting alongside the upcoming Elizabeth Line and, in the longer term, HS2. Moreover, London remains a highly successful hub for people, making it a key focal point in the global knowledge economy. There is expertise in London in established industries like finance, insurance, law and accounting, which is very difficult to replicate elsewhere. We know this for a fact: Brexit has encouraged many cities and governments to engage in Herculean efforts to build a “London” elsewhere in the EU and they have only won a small number of relocated jobs for their troubles. London has also carved out an enviable place in the digital economy; a borderless world where Brexit is less of a constraint than in heavily regulated businesses like finance and insurance. The capital’s success in attracting these sunrise industries owes much to its desirability as a place to live. Too much emphasis is placed on the cost of housing, and not enough on the city's vast cultural and leisure scene. Those who live in London, however, are keenly aware of this benefit. Our timeline serves to remind us that London has faced numerous setbacks in the past but has gone on to set new market benchmarks. This resilience underpins London's attraction for investors and occupiers alike.
Citi 2002-2003
One Canada Square completes
Terrorist bombings bring the City to a standstill
The worldwide web changes communication forever
The dotcom bubble finally bursts
2012
2018
2008
Lehman Brothers 2003
Inevitably, all this will prompt the obvious retort, that the UK is still to leave the EU. However, this is a fig leaf for continuing to predict bad news at a later date with no supporting evidence to justify the implied pessimism. Pursuing this logic, we should be asking, is there evidence for optimism? The timeline below this text is a history of London’s resilience as a business location. This is based on a bedrock of economic fundamentals.
2003
iPhone launch begins a new era for smart phones
2000
Lehman's collapse fuels global recession
1991
Google Campus joins Tech City
1993
Battersea deal set to transform London
Despite the uncertain outlook post the Brexit vote, London take-up reaches 14.8m sq ft – the highest since 2014
London’s Economy: future-proofed
Nevertheless, it would be wrong to portray the situation in London since the referendum as “business as usual”. The economy has changed, albeit following trends that pre-date the vote to leave the EU. Output growth in 2017 and 2018 for London’s information and communication sector is estimated at 8.9% by Experian Economics. The equivalent figure for finance and insurance is 1.9%. Interestingly, London’s professional sector is estimated to have seen growth of 9.1%, which is in line with information and communication. Our interpretation of the above figures is that those industries that previously depended on finance for work have now expanded to serve the information and communication sector. This has both spurred growth and diversified income streams. The recent arrival of more scientific jobs in the capital, from King’s Cross to Stratford, will add further variety to the economy. Diversity will leave London stronger and safer when facing future downturns. However, the elephant in the room is a hard Brexit. This would undoubtedly have a negative impact on the UK economy, but more so in manufacturing districts, which are largely found outside London. The government has said that after a hard Brexit it would reduce the tax and regulatory burden on businesses in order to attract investment. This would lessen the negative consequences for London, with its services-oriented economy.
Below are the four key risks facing London’s economy. Each is rated one to five on the likelihood of occurrence, with five being the most likely
Powerhouse
Based on IMF figures, if London were a country, by GDP it would rank as the 25th largest in the world, far ahead of self-governing cities such as Hong Kong (in 34th place) and Singapore (37th). Figures from Experian Economics suggest that GDP has grown steadily every calendar quarter since the referendum. Taken together, and with the tech and scientific growth mentioned above, these factors prove London is an economic powerhouse big enough to rise above the turbulence of Brexit. Amazon’s much-discussed HQ2 search in the US was an acknowledgement that concentrations of talented workers are scattered across the globe. To mine these knowledge pools, firms need to take the jobs to where the right people are found and, if anything, recent years have seen London cement its position as a talent magnet. Despite Brexit, London still leads in European venture capital investment and foreign exchange trading. London’s position as a global economic hub will strengthen as the digital and scientific revolutions gain momentum.
“The recent arrival of more scientific jobs in the capital, from King’s Cross to Stratford, could add further variety to the economy. Diversity will leave London’s economy stronger and safer when facing future downturns”
Likelihood 3
Likelihood 4
Hard Brexit
The end of QE
The Bank of England has indicated that interest rates are now on an upwards trajectory. Rates are, however, also expected to peak at lower levels than we were used to pre-2008. The risk premium offered by property yields will absorb most of the increase.
Risk radar
The rollercoaster politics at Westminster means we must take this risk seriously, although recent parliamentary votes show supporters of a no deal Brexit are in a minority in the Commons. On the UK side, preparations for a hard Brexit scenario have been minimal, and at the time of writing this feature there is growing speculation that Article 50 may be extended.
Diversity flourishes
Written by
Chief Economist
While the politicians continue to squabble over Brexit, the capital’s economy is guaranteeing its future growth through diversification
In the aftermath of the vote to leave the EU in June 2016, many commentators singled out London as a region expected to be particularly hard hit by the economic fallout. The reality has been very different: indeed, ONS figures show that the two years following the referendum saw the capital’s workforce increase by 278,000 jobs on a net basis. Around 26% of these new roles were in the fast growing information and communication sector. Even the financial sector has seen over 5,800 jobs created since the referendum, disproving the forecasts of tens of thousands of Brexit-related relocations abroad. A recent survey by Reuters of London’s financial and insurance firms found that just 630 jobs have moved so far and that, in the event of a hard Brexit, the figure would rise to just 5,800. This would be the equivalent of 1.4% of London’s financial and insurance workforce.
Likelihood 3
Likelihood 5
Tech stumbles
Unemployment in the UK is at its lowest for decades and pay inflation is accelerating. Brexit has made immigration a political hot potato and companies are adopting a “grow your own” approach to talent management, which will make educational infrastructure a key element of amenity provision. Expect more employers seeking offices with a wow factor that boost staff morale.
Labour shortages
Stock market volatility in recent months reminds us that the tech sector is no stranger to boom/bust cycles. However, tech is also delivering a continuous flow of innovations that are transforming our lives. 5G telecoms technology is about to be rolled out worldwide, which could spark a new wave for the sector.
James Roberts
PAGE / six
INVESTMENT CAPITAL
2018
7. Israel
ANNUAL TOTALS
Middle East
Investment in numbers
9. Norway
6%
paris
Boston
Tokyo – five Wards
9%
5%
5. US
Hong Kong Island CBD
Frankfurt
Seoul CBD
3%
The underlying forces of demand
16%
10%
While 2018 was a strong year for the delivery of new space, vacancy is less than 6.5% and an overall shortage remains. Consequently, we expect rental growth in 2019. Although we have been highlighting this prospect for some time, it has only recently become widely accepted. The rising cost of construction combined with labour shortages should serve to keep new supply in check. Research conducted for our Knight Frank Wealth Report shows that private wealth is growing at the fastest pace in emerging markets, where real estate markets are typically neither deep nor transparent. When possible, those in control of this wealth will increasingly seek to invest it in markets that do enjoy these characteristics. As one of the largest and most transparent real estate markets in the world, London is an obvious choice.
4%
17%
21%
2%
Our outlook
Source: Knight Frank Research
Don’t forget the domestic investors
2%
£16.2bn
Average deal size
Other
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
London
100 80 60 40 20 0
14%
Manhattan
4%
Source: Knight Frank Research
25 20 15 10 5 0
Los Angeles
Annual investment (£bn) (LHS)
100 80 60 40 20 0
Chicago
• Emerging market volatility will drive a search for safe haven assets.
25 20 15 10 5 0
• London assets have become cheaper abroad.
• Supply shortages are driving rental growth for prime stock.
10%
• The return of debt.
5%
asia-pacific
4%
56%
11. Rest of World
UK
Source: RCA/Knight Frank Research (Data as at 15 January 2019)
1. Greater China
2017
Investment has remained REMARKABLY buoyant
£40bn
Source: Knight Frank Research
3. South Korea
12%
Source of London office investment by nationality
London’s global appeal
Commercial Research
1%
Rest of World
Knight Frank global capital tracker
1%
2%
16%
0%
North American
A decade of ultra-low interest rates globally has fuelled demand for assets across the investment spectrum. Consistently one of the most liquid and transparent markets in the world, London remains a bellwether for the transmission of this demand into real estate. The era of cheap capital is ending in some developed economies as quantitative easing unwinds, and some are questioning the short-term implications for real estate. However, we believe that the process will take many years and that the direct effect will be limited. Central banks are reluctant to go too far, and the Bank of England is expected to raise interest rates only very gradually. London’s global appeal During this transition, the weight of capital already allocated to real estate will continue to be deployed – and be complemented by new sources from emerging markets. The march of global wealth creation, the expansion of savings and insurance vehicles, and a gradual dismantling of capital controls are structural shifts that mean investment in real estate globally will continue to grow, largely irrespective of economic cycles. Our view is that these forces will continue to channel capital into assets in key global cities, with London among the most desirable.
With over £16 billion of transactions in 2018, the London office market has seen more investment than any other global city, as has also been the case for nine of the past ten years.The role of foreign capital has never been more significant. Over 80% of acquisitions were driven by overseas purchasers, with a nationality mix that is becoming less heavily dominated by Far Eastern investors as European demand re-emerges.
As ever, some investors will seek to access the market in a variety of ways besides the purchase of direct assets. In particular, we note two themes: We see appetite to lend on income-producing assets from a variety of sources, including domestic insurance companies, German lenders and, increasingly, institutions from the Far East. In particular, with loan-to-value ratios commonly at 60%, some lenders see the provision of real estate debt as a defensive way of gaining exposure to London assets. • While in the longer term we expect rising interest rates to push up the overall cost of finance for domestic lenders, competition within the market means margins themselves will remain under downward pressure. We see this having a particularly positive impact on debt funding for the acquisition of prime London assets, as these large-ticket transactions attract the most interest from a range of lenders. Domestic developers delivered 88% of the 6 million sq ft of space completed in 2008. Fast forward a decade, and the equivalent share has dropped to 50% as overseas investors, led by those from the US, now account for the other half. This is no short-term anomaly, as domestic investors only account for a marginally higher share – 56% – of the entire development pipeline. • The overseas players active in the London market will increasingly take a role in development. This reflects both the need to access returns higher up the risk curve in a low yield environment and, in some cases, greater familiarity with the market. Office investment in London will not be immune to the impact of political uncertainty in 2019, and competition from other global cities will remain fierce. Yet we believe that attractive pricing, rental growth prospects, and the sheer weight of capital targeting real estate will see London remain one of the world’s most liquid real estate markets.
20%
Written by
10.7bn
uk
8. Spain
2017
Europe
Leading global cities for office investment 2018 (US$)
10. Canada
Despite political uncertainties, London retains strong international investor appeal
£16.8bn
10%
15.9bn
6.8bn
9.0bn
7%
Greater China
6. Germany
11.1bn
9.7bn
Israel
William Matthews
1%
European
Nick Braybrook
42%
US & Canada
2. UK
Greater China
2018
Capital Markets
How will London continue to attract global capital flows?
total
4. Singapore
the Shifting sources of demand
Other Far Eastern
Share of space in development pipeline by nationality
Average deal size (£m) (RHS)
20.9bn
2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Knight Frank Research
18.8bn
0%
London office investment over time
PAGE / seven
Annual investment
5.9bn
Average deal size
5.7bn
We highlight a number of specific factors that we believe will draw global capital towards London real estate in 2019: IMF forecasts suggest that global growth has peaked. In particular, trade disputes and a credit-induced slowdown in mainland China have sparked uncertainty in emerging market equities: the Shanghai stock market has lost over 20% of its value since the start of 2018 and volatility is rising. We expect this to fuel exports of capital from economies facing similar concerns, and note that London is traditionally a popular choice for maiden overseas purchases. London’s prime office yields have not moved in the past year. In contrast, many continental European markets have seen yields continue to edge down, and in some cases they are now considerably lower than those in London. Meanwhile, sterling’s continued weakness represents an advantage for overseas investors, especially those relying on US dollar-denominated capital. This is partly because the Federal Reserve has hiked rates faster than anywhere else. INREV estimates that over half of global investors purchasing US real estate hedge their dollar exposure. For these investors, rising hedging costs make US real estate relatively more expensive and other locations, such as London, comparatively more attractive.
Annual investment
• Conversely, the total cost of hedging dollar exposure has increased.
• The continued accumulation of private wealth.
Middle Eastern
• The internationalisation of the development pipeline..
London Tenant Representation
Corporate structures and cultures are changing. As the supply chains of big business deepen and broaden or the workforce of a business becomes multi-generational, real estate must also change in order to drive new behaviours and support business cohesion.
Next wave technology, new business models and new demand
Workspaces that offer occasional sanctuary from the always on, always connected reality of modern work will prove increasingly popular.
A move towards spaces that have greater allocations of public touch-down space to enable engagement between the occupier and its suppliers
More considered occupier requirements with a broader range of stakeholders seeking more bespoke solutions.
A continued flight to, and increased competition for, the best quality stock and a willingness to pay premium rents to secure the best solutions.
Three implications for London
Space-as-a-service becomes the demand default
New operators will take root in the London market and seek to attract larger-scale occupiers.
Real estate has become a strategic device that facilitates, supports or portrays business transformation. The workplace is no longer simply a business cost to manage downwards or a basic container in which to place people. It is central to enhancing individual and collective productivity and bolstering corporate competitiveness.
Written by
Dr Lee Elliott
Whether challenged by talent shortages, seeking financial efficiencies or attempting to establish a new identity, occupiers are on the move within and between markets. When coupled with relatively limited supply and the new strategic significance of the real estate decision, mobility will continue to characterise London’s future demand profile.
Five trends will shape the quantum and qualities of occupational demand in the London market over the next three years
Further movement of occupiers towards key and emerging transport hubs to increase their talent catchments.
Richard Proctor
Continued London-wide searches and a rejection of traditional sub-market boundaries by the occupier.
Global Occupier Research
The innovation imperative will force occupiers towards space that supports high-end, innovative, value-add functions as lower value processes are automated.
To find out more about how occupier attitudes towards real estate are changing and what this means for global real estate markets including London, read our (Y)OUR SPACE report.
London’s new occupational orthodoxy
Recognisable tech hubs that offer a strong supply of tech talent, connection to academia and a culture of innovation that supports a more broadly defined technology sector (encompassing, for example, the life sciences) will outperform the wider market.
The adoption of next wave technologies, such as automation, robotics and AI will radically alter business structures and processes. When businesses change shape, so do real estate requirements. We anticipate further technological disruption being a driver of new market demand.
A diversification of amenity provision within buildings with a growing emphasis on healthcare provision to support multi-generational workforces.
Changing corporate constitutions
Productivity push v2.0
For larger requirements, a greater desire to enter into pre-construction pre-letting to better align property with business need.
Real estate is shifting from being a fixed physical product towards a flexible, customer-centric service. As the co-working phenomenon has shown, space which is available on flexible terms and provides a positive workplace experience will be in greatest demand. Landlords will need to respond to retain relevance, revenue and returns.
Increased co-existence of conventional and flexible space within individual schemes and/or buildings will become a reality and be recognised by landlords as a means to activate and enliven spaces.
Conventional landlords will respond with their own offer, bringing greater customer service and flexibility to the fore as they seek to secure occupiers.
Mobility shapes London’s FUTURE DEMAND PROFILE
Growing “one roof” relocations or clustering to bring together disparate elements of businesses will drive efficiency and collaboration. This will be particularly evident within the media sector.
Tech companies, and notably the tech titans that are heavily invested in next wave technology, will continue to be a key source of occupational demand, particularly as Europe and the UK hold world leading positions in these technologies.
PAGE / eight
How buildings and services should respond to changing occupier expectations
Ethos
BT Sport, UCL Institute of Robotics, Sports Interactive, Matchesfashion.com, Loughborough University London, Ford Smart Mobility Innovation Office, Signal Noise, Hobs 3D, LC2, Barratt London, Scope, Studio Wayne McGregor, Neopost, The Trampery on the Gantry (85% let). Variety of canal-side restaurants, cafés and bars, Plexal Innovation Centre, 300–1,000 person event space, central yard area for outdoor events, food markets and tenant engagement programmes, Westfield shopping centre, Olympic Park and sporting facilities (pool, track cycling, velodrome, tennis, hockey, London Stadium), full wifi across the campus, shuttle bus service linking to adjacent transport nodes, 289 car spaces, extensive bicycle and shower facilities. Here East is a 1.2 million sq ft scheme on the Olympic Park that focuses on technology and innovation. Having formerly been the broadcast and press centres for the Olympics, the buildings offer unparalleled connectivity. Through highly active tenant management, Here East has curated a diverse community of tenants with strong inter-connections, particularly via the mix of start-up businesses in Plexal, Here East’s innovation centre, which now hosts the government-backed Cyber Security Programme, and via strong commercial links with PhD students from UCL and Loughborough University London. The two buildings provide an unusual mix of very contemporary office space and large studios incorporating eaves heights of up to 11m, allowing tenants to create unique and exciting working environments to attract and retain talent.
Cost no resource to adapt Outdated technology IT Security
Workplace
Written by
Expectations Flexibility Aligning Space to Need Community & Collaboration Customer Service & Engagement Wellbeing & Amenity Data-Driven Optimisation
Hayley Blackwell
London Research
Abby Brown
London Agency
Amenities
Occupiers
Case Study: The westworks, white city place, w12
A design for life
Image: The Smiths Building, TOG
Occupiers
Case Study: HERE EAST, E15
ConstraintS
outcomes Attracting & retaining best talent Job satisfaction Lower staff turnover Less staff sickness Increased productivity Boost team ethos and avoid convergence Businesses flourish enhanced business brand and image
facilities Acoustics Basebuild Information Clear Water Systems Building grid Fresh Air & Cooling Capacity Natural Light Biophilia Fire Strategy Toilets Technology Security STANDBY GENERATOR TENANTS' CATERING Great Building Management
What does an office space require to provide the winning working environment?
Investors and developers must begin to think of buildings less as simply products and more as solutions for their customers. As well as affecting the design and servicing of the building, this also has more practical considerations. In an operating environment where business planning cycles are reducing, flexible and shorter-term leases will be in demand. However, occupiers will also be seeking solutions that offer quick and easy access to property, the ability to scale up or scale down on demand, and a more straightforward exit. Conventional product is often hindered by a legal process that takes too long and is too complicated. Fit-outs, including Wayleave Agreements, are a hassle for the large number of occupiers who do not have dedicated in-house real estate expertise. Approval of alterations to space during a term can also be tortuous, particularly with a disengaged landlord and management team. Dilapidations are often an unpleasant sting in the tail, creating further uncertainty and cost for the occupier. Conventional landlords will, in our view, have to adapt their approach to leases and the delivery of space in order to compete for and secure typical-sized occupiers. They need to embrace some of the thinking of the co-working operators and develop solutions to remedy the limitations of the current customer experience. Short-form leases or pre-agreed Wayleave Agreements, which allow greater speed of occupation and greater certainty around obligations, would for example, be a positive development for the customer. The new demand dynamic brings an interesting challenge to the supply side of the industry. Investor and developer thinking must extend beyond the physical product towards customer service. Office buildings must be positioned as solutions to the many challenges facing the customer and experiences that support increased workplace satisfaction and productivity. Buildings that do so will be relevant to the occupier and will therefore have a longer life as income-producing investments.
"Conventional landlords will, in our view, have to adapt their approach to leases and the delivery of space in order to compete for and secure typical-sized occupiers"
The demands and expectations of occupiers are clearly changing. As well as an appetite for a greater alignment between their business and their property, occupiers are seeking real estate solutions that support changes in business culture, structure and constituents. There has been a clear change in dominant business culture over the last five years. Businesses increasingly compete based on innovation rather than scale. Consequently, workplace design needs to bring people together to support collaborative idea generation and development. Occupiers are therefore seeking diverse and agile working environments that allow staff to work across functions or departments, often on a temporary basis. The implications for the supply side of real estate are clear. Think less about a binary distinction between open plan and cellular offices. Instead, focus on the promotion of spaces that support Activity Based Working – spaces that are as varied as the tasks undertaken within them. The rise of innovation up the corporate agenda also has structural implications. True innovation often requires collaboration with external specialists or even greater connection to those previously regarded as competitors. As such, offices must support interaction between companies – one of the principal drivers of the co-working phenomenon. This will lead to the greater use of public touchdown space within buildings to enable informal interactions with experts and suppliers outside of the secure corporate mothership. Changing business cultures and structures, when combined with the ongoing and longstanding war for talent, are pushing occupiers towards amenity-rich buildings and environments. These amenities are a key part of the real estate decision-making process and can, for landlords, be the difference between securing or losing occupiers. This has been intensified as occupiers have become largely location agnostic. The increased willingness of occupiers to move between sub-markets to secure the best product raises the stakes but increases the opportunity. No longer is it sufficient to have simply a well-designed building. Instead, best in class offices create compelling workplace experiences by being accessible, amenity rich and service heavy, as well as supporting a culture of innovation and creating a sense of community. This has been key to the emergence of attractive new workplaces in sub-markets such as Stratford or White City or the continued competitiveness of sites, such as Chiswick Park, that enliven the experience of work.
Ethos
Image: The Westworks, White City Place – Tyson Sadlo
ITV Services Ltd, OneWeb, Jelly Cat, Arts Alliance Media Ltd, Synthace, Novartis, GammaDelta, Attention Seekers Production Ltd, Parker Lane, Cutting Edge Music (Holdings) Ltd (75% let across the White City Place estate). Co-working reception, central gardens, terraces, café pavilion, cinema, car and bicycle spaces, showers and lockers, ground floor retail. The design of WestWorks is based on the concept that creativity is a business imperative and is best generated through networks. A comprehensive 290,000 sq ft refurbishment, completed in 2017, has attracted a plethora of occupiers from the technology, media and telecommunications, corporate and pharmaceutical sectors. The WestWorks ethos is that creativity is the result of knowledge, experience and inspiration. The buildings encourage collaboration through the provision of a co-working reception, communal gardens, recording studio and a variety of ground floor retail outlets. It’s an environment that looks to blur the lines between work and play, recognising that creative success is inextricably linked to how we feel about where we work.
Amenities
PAGE / nine
A growing area of derivative demand is medtech, which constitutes all technologies developed or applied to save the lives of individuals suffering from a wide range of medical conditions. Covering a wide spectrum of activity between pharmaceuticals, life sciences, biotech and preventive medicines, medtech is already diagnosing, monitoring and treating virtually every disease or condition that affects us.
LegalTech
Dr Lee Elliott
Derivative Demand
Insurtech describes the use of technological innovation to squeeze savings and efficiencies from the current insurance industry operating model and is founded on the premise that the industry is ripe for innovation and disruption. Many insurtech companies are exploring avenues that the larger insurance firms have less incentive to exploit, such as offering highly personalised policies, social insurance and using new streams of data from internet-enabled devices to dynamically price premiums according to observed behaviour.
FinTech
Technology and software is also being used to transform the provision of legal services. Legaltech companies are generally start-ups founded with the purpose of disrupting the traditionally conservative legal market. Legal technology has traditionally focused on law firms with practice management, document storage, billing, accounting and electronic discovery. The market has however evolved to encompass technology start-ups that disrupt the practice of law by giving people access to online software that reduces, or in some cases eliminates, the need to consult a lawyer, or by connecting people with lawyers more efficiently through online marketplaces and lawyer-matching websites. There is growing evidence of collaboration between legaltech start-ups and more established legal services companies.
As traditional industries are reshaped by technology, new sources of demand emerge
Medtech
“As technology reshapes traditional industries, London is becoming a global centre of excellence for emerging hybrid sectors”
The application of new technology to improve and automate the delivery and use of financial services has given rise to fintech; an industry in which the UK dominates, accounting for more than $16 billion of global investment in H1 2018 – more than any other country. Fintech is allowing companies, business owners and, increasingly, consumers to manage their financial operations, processes and lives more effectively and efficiently through specialised software and algorithms. Fintech has expanded to include any technological innovation in, and the automation of, the financial sector, including advances in financial literacy, advice and education, as well as the streamlining of wealth management, lending and borrowing, retail banking, fundraising, money transfers/payments, investment management and more. Fintech also increasingly encompasses the development and use of cryptocurrencies such as bitcoin.
Written by
Global Occupier Research
According to the Office for Life Sciences, the UK medtech sector consists of more than 3,500 businesses and produced revenues of £22.2 billion in 2017. Digital health is the largest medtech sub-sector in the UK by employment, with London accounting for almost a quarter of all employment.
The UK is Europe’s leading insurtech market and London is at the very epicentre. US$364 million was invested in UK-based insurtech companies in 2017 – a notable increase on the US$19 million invested in 2016.
London’s emergence as a tech centre of global standing is well understood. Most are aware of the sizeable commitments to London made by tech titans such as Apple, Google, Facebook and LinkedIn over recent years. Yet the influence of technology on London’s demand profile is more wide-ranging. All industry sectors are facing up to a digital transformation, leading businesses to respond with new and different real estate requirements. Even more significant has been the melding of traditional sectors with technology to create entire new hybrid industries and a new range of well capitalised, high growth companies. Four derivative tech sectors have particular significance for the London market and are worthy of continued monitoring as sources of future occupational demand.
PAGE / ten
The UK government has recently announced its support for an industry-led delivery panel to “boost new legal technologies”.
London-based start-ups accounted for over 90% of all money raised by UK fintech firms in 2017, including major funding rounds for disruptors such as TransferWise (£211 million), Funding Circle (£81.9 million) and Monzo (£71 million).
InsurTech
• Wellcome Trust • GMC
16
10
20
22
30
30
44
12
A broad spectrum of institutions that support the functioning, growth and development of the life sciences sector. Includes funding sources, regulatory and representative bodies, the NHS, private hospitals and healthcare providers, as well as professional consulting services.
36
26
04
02
21
London already has a robust community of over 1,245 life science companies1. Notable occupier activity in the second half of 2018 included commitments from Novartis UK, Autolus and GammaDelta Therapeutics to take space at The WestWorks in White City. London is extremely attractive for a number of reasons, including access to early stage funding, a sizeable customer base and clinical trial infrastructure. It is also an established hotbed for life sciences, tech and data analytics, able to capitalise on sector convergence and easy access to the “Golden Triangle”. While not restricted to London, access to the NHS is also a huge draw. But the main pull factor is the cluster effect. In an industry that spends huge amounts on, and achieves significant competitive advantage from, R&D, co-locating alongside talent, academic institutions, healthcare centres and peers is crucial. London has a world-leading scientific talent pipeline and academic and healthcare infrastructure.
Develops, produces and markets drugs or pharmaceuticals for use as medications.
The global life sciences sector is expected to grow 25% to US$2 trillion by 2023
Research & development
• Medtronic • Siemens Healthineers • BenevolentAI
24
London’s life science scene
20
33
At the Francis Crick Institute in London NW1, researchers are working to discover new ways to diagnose, treat and prevent cancer. Travel west across London to Imperial College's White City Campus and teams are pioneering advances into the diagnosis, prevention and treatment of musculoskeletal diseases. The life sciences sector is alive and well in London and, as we enter into one of the fastest moving periods of scientific innovation in history, the sector will be a key feature of London’s demand profile over the coming years.
Three-year outlook for the london life sciences sector
1. Source: ONS, as at March 2018. UK SIC codes: manufacture of basic pharmaceutical products; manufacture of pharmaceutical preparations; manufacture of medical and dental instruments and supplies; research and experimental development on biotechnology; other research and experimental development on natural sciences and engineering.
“Birds of a feather, flock together”
Defining the life sciences sector
ANCHOR
35
26
14
42
06
44
27
28
46
38
Developing the London Life Sciences Ecosystem
Note: Players marked on the map are examples, rather than an exhaustive list. An anchor is defined as an entity that pulls other partners in. Occupiers are either a) in the top ten London headquartered life science companies ranked by latest turnover or b) notable life science start-ups, sourced from medicalstartups.org Location is based on publicly available information.
34
There are a number of drivers behind this growth trajectory, namely: • A perfect storm of major public and private investment. • A healthcare system with an urgent requirement to improve patient outcomes and operational efficiency. • Technological advancement and disruption that is creating new opportunities and entrants in the sector as well as leading to greater sector convergence. • An ageing population with more complex healthcare needs. • A health and wellbeing agenda taking hold at individual and corporate level. • Data-driven diagnostics and the rise of preventative healthcare.
The Wellcome Trust UCL University College Hospital Cell and Gene Therapy Catapult Imperial White City Incubator Johnson & Johnson Innovation Centre London BioScience Innovation Centre Queen Mary Bio Enterprises RebelBio Amryt Pharma Autolus Babylon Healthcare Services BenevolentAI BTG International Cerner Corporation Health Unlocked
22
40
In conclusion, the life sciences sector will develop rapidly over the next three years. While the precise shape of the UK life sciences sector will clearly be influenced by the ultimate EU withdrawal agreement, we anticipate the following trends in future demand from the sector:
32
36
The commercial development of those branches of science that involve the scientific study of organisms, including human beings. Applications in the health, agriculture, medicine, pharma and food science industries
18
08
OCCUPIER
Image: The Francis Crick Institute, NW1
• GSK • AstraZeneca • Pfizer
38
40
Biotech
31
Any technology that can be used in a care setting. A broad area that includes: 3D printing, AI, artificial joints, robotics, syringes, connected health IT, diagnostics, wearables and implants.
28
29
08
Life science companies generally conduct their own in-house R&D but increasingly partner with a range of organisations including: academia, research institutions and outsourced service providers. and implants.
Occupier Research
Biotechnology uses scientific principles to create technological applications that use biological systems, living organisms or derivatives thereof to make or modify products or processes.
Victoria Shreeves
Broader ecosystem
• Francis Crick Institute • Imperial College • IQVIA
25
The appliance of science
21
39
London Research
“Creating a sense of place is as vital as building the right physical spaces”
In response to the growing demand outlined above, parts of the city are being redeveloped into world-leading life sciences clusters. A prime example is the Knowledge Quarter, a consortium of over 90 academic, cultural, research, scientific and media organisations located in a small area around King's Cross, Bloomsbury and Euston. Notably, the quarter is home to the Francis Crick Institute, the largest biomedical research facility under one roof in Europe. The quarter has also attracted artificial intelligence and tech companies such as DeepMind and Google. Key attributes of such developments include having one or more anchor institutions such as a hospital, research institute or university, provision of collaborative spaces, providing an advanced digital infrastructure and proximity to transportation nodes. Dedicated lab space has specific technical requirements that differ from a traditional office fit-out such as the need for increased floor loading for part of the floorplate, larger riser areas for extraction and upgraded power supply/back-up generators. Creating a sense of place is as vital as building the right physical spaces. Examples include curating a variety of events that bring people together, opening spaces to the public and encouraging opportunities for collaboration between occupiers.
18
Jennifer Townsend
Written by
INNOVATION CENTRE/INCUBATOR/ACCELERATOR
47
23
12
03
07
17
11
01
24
14
31
Note: There is increasing convergence between these different segments.
32
42
13
09
34
45
05
04
25
19
27
05
Pharmaceutical development & manufacture
19
09
10
Scientific R&D is urbanising, with London well placed to capture growing demand from the life sciences sector
• Gilead Sciences • Celgene Corp • Biogen Idec
03
01
13
EXAMPLE
02
11
43
Medical technology
06
41
17
39
37
• Life science occupiers will continue to be attracted to the London market as they seek to access its pool of knowledge and talent. This will be aided by government initiatives such as the UK Life Sciences Sector Deal and the Department of Health and Social Care’s plans to digitise the NHS. In particular watch out for greater demand from medtech and big pharma relocating certain functions to London. • While there will still be demand for wet lab space, more life science companies will conduct research via desks and computers, shifting occupational requirements towards standard office product that appeals to both tech and scientific talent. • Sector convergence will result in acquisition activity, driving real estate disposals and future occupational demand. • Developments in close proximity to an innovation ecosystem and that create a sense of place and vibrancy will be most attractive and as a result will outperform the market. • With demand outstripping supply, buildings next to existing life science clusters will seek planning permission to convert into appropriate space. Separately new clusters will emerge near to anchor institutions such as hospitals and universities. • The need for flexible space to support rapid scale-up amid increased investment will support the emergence of new and specialist co-working spaces targeted exclusively at the life sciences sector.
33
15
43
07
45
37
29
47
16
46
PAGE / eleven
35
City, University of London Francis Crick Institute Great Ormond Street Hospital Guy's Hospital Imperial College White City Campus Kings College, London London School of Hygiene and Tropical Medicine Moorfields Eye Hospital Queen Mary, University of London St Bartholomew's Hospital St Mary's Hospital St Thomas' Hospital The Royal Brompton Hospital The Royal London Hospital The Royal Marsden Hospital The Royal Veterinary College
15
Hikma Pharmaceuticals Hinge Health Hvivo PLC Kheiron Medical LivaNova MedoPad Novartis (expected to move in 2020) Orchard Therapeutics Shire Pharmaceuticals Group Smith & Nephew Stallergenes Greer Takeda Europe Research and Development Centre Ltd TrialReach Umotif Venn Life Sciences
23
41
The implications for landlords and developers are:
future gazing
Five Big Trends to watch in the next Five Years
certain moderately certain UNCertain
5. Modular Construction
4. Placemaking
CONSIDERATIONS FOR DEVELOPERS
2. the Rise of second cities
1. Affordability
3. Age-targeted Living
*Faster conveyancing/fractional ownership
FUTURE GAZING
One of the principal concerns for the residential development sector, as well as other property sectors and indeed the country at large, is undoubtedly Brexit. The ramifications from a period of prolonged political uncertainty are already being felt. However, while the economic and political effects of the UK’s eventual position within the EU will be long term, the uncertainty is a shorter-term affair and is dominating the news and headlines. For this edition of The London Report, we are looking “through” Brexit to an extent, and focusing on five of the biggest trends that will emerge or gain significant momentum over the next five years. The search for affordable housing, whether in terms of house price to income ratios or the proportion of net income spent on housing costs, will continue to shape new housing delivery. The growth in the private rented sector (PRS) over the last decade has, in part, been fuelled by the dramatic shift in home loan requirements after the financial crisis, including the requirement for a large deposit. As ultra-low interest rates begin to normalise, the cost of servicing a mortgage will also rise, prompting further growth in the PRS, which is starting to offer an increased range of cost-effective, affordable housing. In the sales market, design and use of space will become paramount as capital values are increasingly more important than price per square foot. The rise of second cities is also linked to affordability, with the lower residential capital values in some of the UK’s largest cities, relative to London, fuelling demand. This trend is not happening in isolation, however – businesses are also being lured to cities, including but not limited to Leeds, Birmingham, Cardiff, Manchester and Edinburgh, by lower office rents, large pools of talented workers and the lower cost of living. In many cases, this pick-up in economic activity has also been boosted by transport upgrades or large-scale regeneration driven by national and local government. We are already seeing increased specialisation of housing, from student to retirement, via co-living and build-to-rent. Expect these trends to become more prevalent as developers target specific age groups by catering more closely to their needs and aspirations. This will be especially true when it comes to older people. It is well understood that many of the family houses built over the last century are not designed for older people who might need additional support. Housing which encourages active living but offers flexible levels of extra care will become an established residential asset class in the years ahead, underpinned by the UK’s ageing population. We anticipate a rise in institutional investment, with investors looking for long-term stable income. The importance of public realm has long been understood by developers. In future, placemaking and the experience of buildings, in order to better connect people to their homes and to each other, will grow in importance on a more macro level. For developers, this may mean working, not only on the detail of their own scheme, but also in conjunction with local planners and councils as increasing attention is paid to how lifestyle can be improved by the urban environment. Developers are increasingly looking at ways to streamline residential construction, not only to mitigate rising construction and material costs but also to ameliorate the challenges around a lack of labour availability. There is also pressure to deliver housing, especially affordable homes, much more quickly, resulting in a concerted move to modular construction over the next five years. This will speed up the development pipeline across the UK, especially in urban areas. Developers who are flexible in their operations will be primed to benefit from this shift.
Written by
PRIMARILY URBAN (flats)
James Mannix
Head of Residential Development and Investment
Uncertainty will have an impact on development in the future
Gráinne Gilmore
UK Residential Research
What are the trends that will shape residential development over the next five years?
Select any of the icons above to filter mind-map
PAGE / Twelve
crosses between segments
Key Contacts
Capital Markets Nick Braybrook
william.beardmore-gray@knightfrank.com
Head of City Offices
Commercial Research William Matthews
Commissioned by:
Group Head of Marketing & Communications & Digital Simon Leadbetter
Head of London Offices William Beardmore-Gray
William Beardmore-Gray
Angus Goswell
Important notice
James Mannix
Important Notice
philip.hobley@knightfrank.com
PAGE / thirteen
Head of West End Offices
Head of Residential Development and Investment James Mannix
Commercial Marketing Manager Sally Clements
Head of Corporate Communications Alice Mitchell
Occupier Research Jennifer Townsend
Global Occupier Research Lee Elliott
Chief Economist James Roberts
London Tenant Representation Richard Proctor
London Agency Abby Brown
Written by:
London Research Hayley Blackwell
Produced by Real Media Group
Head of London Offices
angus.goswell@knightfrank.com
This report is provided strictly on the basis that you cannot rely on its contents and Knight Frank LLP (and our affiliates, members and employees) will have no responsibility or liability whatsoever in relation to the accuracy, reliability, currency, completeness or otherwise of its contents or as to any assumption made or as to any errors for any loss or damage resulting from any use of or reference to the contents. You must take specific independent advice in each case. It is for general outline interest only and will contain selective information. It does not purport to be definitive or complete. Its contents will not necessarily be within the knowledge or represent the opinion of Knight Frank LLP. Knight Frank LLP is a property consultant regulated by the Royal Institution of Chartered Surveyors and only provides services relating to real estate, not financial services. This report was written from September 2018 – January 2019 and is based on evidence and data available to Knight Frank LLP at the time. It uses certain data available then, and reflects views of market sentiment at that time. Details or anticipated details may be provisional or have been estimated or otherwise provided by others without verification and may not be up to date when you read them. Computer-generated and other sample images or plans may only be broadly indicative and their subject matter may change. Images and photographs may show only certain parts of any property as they appeared at the time they were taken or as they were projected. Any forecasts or projections of future performance are inherently uncertain and liable to different outcomes or changes caused by circumstances whether of a political, economic, social or property market nature. Prices indicated in any currencies are usually based on a local figure provided to us and/or on a rate of exchange quoted on a selected date and may be rounded up or down. Any price indicated cannot be relied upon because the source or any relevant rate of exchange may not be accurate or up to date. VAT and other taxes may be payable in addition to any price in respect of any property according to the law applicable. © Knight Frank LLP 2019. All rights reserved. No part of this presentation may be copied, disclosed or transmitted in any form or by any means, electronic or otherwise, without prior written permission from Knight Frank LLP for the specific form and content within which it appears. Each of the provisions set out in this notice shall only apply to the extent that any applicable laws permit. Knight Frank LLP is a limited liability partnership registered in England with registered number OC305934 and trades as Knight Frank. Our registered office is 55 Baker Street, London W1U 8AN, where you may look at a list of members’ names. Any person described as a partner is a member, consultant or employee of Knight Frank LLP, not a partner in a partnership. knightfrank.co.uk/thelondonreport
james.mannix@knightfrank.com
Head of Residential Development and Investment
London Research Victoria Shreeves
Philip Hobley
UK Residential Research Gráinne Gilmore
Head of London Offices William Beardmore-Gray
