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More cranes on the London skyline, but for how long?

The Deloitte Office Crane Survey for Winter 2016 makes for some very interesting post-Brexit reading. Construction momentum in London has slowed, with 40 new schemes starting over the past six months, compared with 51 in the previous survey.

The authors have flagged up developers’ concern over future tenant demand. Interestingly, they also predict that prime rents will potentially fall in 2017.

Commercial property construction up 4%

The survey does reveal a continuing buoyancy in the London commercial market. Office construction is up 4% from an already high level over the past six months. 41% of space under construction is already let.

For the commercial property lawyer, it is noteworthy that refurbishments are fuelling construction activity, apparently accounting for 70% of new starts. As commercial tenancies become shorter this might very well become a growing trend. It is likely that commercial property lawyers will be called upon for their knowledge of dilapidations and possession.

Some of these properties will be protected by Part II of the Landlord and Tenant Act 1954, where grounds (f) and (g) will continue to pose problems for landlords intending to regenerate their office space with a view to increasing the rent obtainable.

It is noteworthy that reduced rental prospects and a lack of suitable sites were identified in the survey as two of the factors posing the greatest threat to development.

The construction sector in 2017

There are two things that 2017 will bring. By the end of March we shall have a clearer idea of what Brexit might resemble, although the full implications for financial and other services (and the corresponding impact on commercial property demand) will still be unclear throughout the year. The authors of the crane survey have identified this as a source of short-term uncertainty for developers.

One other pattern that developers are aware of is increasing construction costs. Contractors are now more selective about the projects that they tender for. At the same time, there is a perceived shortage of labour, something that Brexit will do nothing to improve. As the survey authors point out, around 30% of materials on a typical project are sourced from overseas: currency fluctuations are also going to play their part in keeping construction prices high.

Business rate uncertainty

The editorial team of the Estates Gazette have highlighted the uncertainty created by the government’s consultation on business rates, the outcome of which will, in my opinion, be the second significant event that we can foresee for 2017.

The consultation on business rates revaluation closed on 26 October 2016. The revaluation will take effect from 1 April 2017. Whereas rates could fall across the south east, they are predicted to rise in London by an average of 11%, with a transitional relief scheme aiming to soften the blow of the change.

Your clients should be alert to changes in the rates and, if necessary, to potential challenges.

Construction trends, new technology and the Internet of Things

One of the trends that the crane survey has picked up is the Internet of Things and the adoption of new technology, as well as the creation of Intelligent Buildings.

Alongside BIM and an increasing adoption of collaborative working practices in the construction sector, this development has the potential to change the shape of facility management. As I have written about elsewhere, these are developments that will change the way that property lawyers will need to view the built environment.

Far from being piles of concrete and brick supported by services that an early twentieth century conveyancer would be aware of, the twenty-first century new build commercial property will be a connected and intelligent structure with corresponding IP, conveyancing and management implications.

2017 is going to be an exciting year in the commercial property and construction fields. Property lawyers are certainly going to be kept on their toes by a number of developments across a number of industry sectors.

Click to view: The Deloitte London Office Crane Survey Winter Survey 2016 

Click to view: The business rates revaluation consultation 

David Sawtell / 21st Nov 2016


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