London Business Matters
Can Tech City expand indefinitely?
By James Ford
Is Shoreditch full? Can supply match demand when it comes to office space in Tech City? Can the commercial property market boom without compromising the feel and character of the area? Will rising rents force tech start-ups to look further afield? Do we need to broaden our definitions of what and where Tech City is?
To answer these questions, London Chamber of Commerce and Industry assembled a panel of experts - Juliette Morgan (head of property at Tech City Investment Organisation), Luke Philpott (surveyor and equity director with DeVono, an award winning firm of commercial property advisers who work exclusively for occupiers) and Jonny Rose (the founder and chief executive of Croydon Tech City) – and then had them cross-examined by a 70-strong business audience.
The statistics on the rapid growth of London’s tech cluster speak for themselves. Between 2003 and 2013 the amount of space used by the tech sector in London has grown by 350 per cent whilst the number of technology firms in and aroundTech City grew from 200 to 1,300 in the three years from 2010 to 2013. Knight Frank has estimated that tech firms acquired 1.6 million square feet of office space in 2013 and, for the third year running, the TMT (technology, media and telecoms) sector was the highest-demanding sector for office space in the City, taking five square foot for every three square foot taken by financial services firms.
Our panel was brutally honest – Tech City cannot expand at its current pace without rents going up. Luke Philpott reflected not just on how much higher rents in Shoreditch were now compared to the pre-crash boom, but also how dramatically they had increased in the years since he started working in property.
Given a spate of recent of op ed pieces lamenting how the increased popularity of Shoreditch and its environs – as exemplified by increased development and the arrival of big name brands – is destroying the area’s distinctive character and feel, it was inevitable that our audience would raise this issue with the panel. Juliette Morgan – who deals with many of the large developers on a regular basis – was quick to point out that many developers understood how important the ‘feel’ of the area had been in attracting creative start-ups in the first place and were designing schemes that were sympathetic to that, often including accelerator, collaborative working and hub spaces into their developments. But, she added, developments still had to be commercially viable and the popularity of the area meant that it was unrealistic to expect Shoreditch to remain unchanged forever.
Quizzed about which new areas were attracting start-ups priced out of Shoreditch, Juliette Morgan suggested that Whitechapel and Aldgate were becoming more popular with creative and high-tech firms. The MedCity development near King’s Cross was making that area an increasingly attractive centre, combining as it did science, technology and creative industries. Jonny Rose wasted little time in highlighting Croydon’s many attractive features. He said that he had been inspired to create the Croydon Tech City concept after he and some fellow tech industry types based in Croydon noticed how the borough’s connectivity, regeneration and cultural offering were coming together to attract an increasing number of like-minded professionals. He remained confident that this trend would continue.
In terms of rival cities emulating or even overtaking London’s success as centre of technology, the panellists were unanimous that London’s rivals were international and not domestic. Global technology firms were more likely to consider Berlin or New York as alternatives to London than they were Birmingham or Newcastle. The panel were all confident that London was on course to maintain its competitive position over its international rivals, provided it could continue to attract sufficient skilled talent.
London Business Matters
Negotiating the best office rental
With moving office ranking as one of the most stressful and expensive experiences for bosses, what are the steps overlooked and misunderstood when negotiating the contract? Luke Philpott advises.
The agreed rent (usually given as a per square foot per annum fi gure) that a party will pay to a landlord until the earlier of either review or lease end. Once agreed and part of an ongoing lease, this is then also referred to as the ‘passing rent’.
Rent free periods or reduced rent provisions
Collectively termed ‘inducements’ or ‘incentives’, these are periods of time that can be negotiated with landlords whereby a tenant will benefit from either not paying any rent and/or from paying a lower rent than the agreed ‘headline rent’ for a period of time, to thus arrive at the ‘net effective rent’.
These are a given building’s running and repairing costs which a landlord will incur in providing and maintaining a commercial building that is fi t for purpose. These costs are most usually reviewed annually and a landlord must not profit (but will also do all necessary to avoid loss) from the recovery of his building’s running and repairing costs. Under a full repairing and insuring (FRI) lease, which are the most commonly granted leases in the UK, a landlord is lawfully able to charge back in full to the building’s tenants the costs of running and repairing his building via the service charge and based upon the respective tenants’ percentage of occupation across the building in question. Reputable landlords should adhere to the latest guidelines on service charges which are set out under the RICS service charge code of practice.
The length of a lease is oft en the starting point in a negotiation and this is a point absolutely at the discretion of a landlord and subject to the agreement of a given tenant during lease negotiations. They can be of any required length and incorporate any required flexibility. They are largely market-dependent, meaning that in a strong ‘landlords’ market’, landlords will look to achieve longer leases with less fl exibility than they can reasonably achieve in a strong tenants’ market where tenants most oft en look for lease lengths that suit them – typically shorter and with greater fl exibility.
Rent reviews and conditions
In any UK commercial lease that extends longer than fi ve years, a review of the headline rent will occur at the anniversary of the 5th year from the start of the lease. The review is actually based upon a hypothetical lease and the parameters and formulas that will play a part in determining the new rent are numerous.
Break options and conditions
Otherwise referred to as ‘options to determine’, these are usually found at some or all of the following lease-commencement anniversary dates; 3, 5, 10, 15, 20. They can be either ‘tenant only’, ‘landlord only’, ‘rolling’ or ‘mutual’ options to determine the existing lease. The conditions that must be met in order for a break option to be legally and effectively served by either party are numerous.
Alienation provisions and restrictions
This refers to a tenants’ right to dispose of their lease to a third party via, most usually, a subletting or some form of sharing in the event of the third party being an entity, subsidiary or affiliated company to that of the head lessee/ tenant.
Capital contributions from the landlord / lessor
There exist formulas in commercial real estate that whilst not bound by law, are bound by a long history of doing things in this way in relation to calculating certain capital contributions (such as special renovations / new fittings) due at the start of a new lease from landlords to tenants.
Rental deposits, covenant / deposit issues
The assessment of a potential tenant’s (to a building) covenant strength is a crucial and often emotive part of any negotiation process. Once a tenant makes an offer for a building or office, they will be required to submit, where available, their most recent three years’ of audited accounts to the landlord for review. There is a specific ‘means test’ that is employed to ascertain if a company’s financial strength (or covenant) is robust enough for a deposit, or other form of surety to be deemed unnecessary.
Schedule of condition / dilapidations containment
It is possible in certain cases and scenarios to limit a tenant’s repairing obligations (sometimes called ‘dilapidations’) at the expiry or earlier determination of their lease. This can drastically reduce the exit costs that a tenant would otherwise be liable for in relation to returning their office to the precise condition of repair that the office was in at the start of their lease. One way that a tenant may achieve this is by successfully negotiating with their prospective landlord the right to document, through words and photographs, the condition of the office at lease commencement – this is called a Schedule of Condition and is then appended to the lease. With an average office lease inLondon averaging not less than a five-year fixed-term, a simple overpayment of the financial terms agreed will provide multiple years of additional costs to the tenant. Having an independent industry expert on-side who understands the office market conditions, and is not confused or influenced by what property agents acting for landlords provide as their comparable evidence to support the terms they are requesting, is vital for any business looking to agree the best possible lease terms. This becomes even more important in an office market in which rental values are increasing considerably.
London Business Matters
Moving office can be a business’s most expensive and unplanned-for costs. While there are numerous services available to make a move hassle free, there are hidden costs in the process, many are unaware of before it’s too late. I estimate that there are fifteen common but often hidden costs involved.