UK: WHEN CITY SNAP-BACKS MAKE SENSE - RELOCATION. - Relocation 2 - Falling rents have increased the advantages, for small and growing businesses, in having a City address.

by Erik Brown.
Last Updated: 31 Aug 2010

Relocation 2 - Falling rents have increased the advantages, for small and growing businesses, in having a City address.

At the beginning of this year, property researcher Geoff Marsh produced a report on the central London office market, mischievously entitled, Why Pay Rent?

Managing director of Applied Property Research, Marsh describes himself as one of the industry's street urchins. And it was in treading the streets around Ludgate Hill that he came across the title for his paper - on a letting board outside an office building in Pilgrim Street.

In his introduction he wrote: 'In 1988, Edward Erdman (a surveying practice) ran an entertaining competition about the date when the first £100 per square foot rent would be achieved in the City. It didn't occur to anyone to offer odds on the first £0 per square foot rent. Nought has now been achieved - albeit with difficulty.' The deals tenants can do - especially in the City - deserve a chapter of their own in the encyclopaedia of urban legend. Free space is available on the City fringes for tenants prepared to pick up the rates bill. But rents for quality air-conditioned space within spitting distance of the Stock Exchange are now lower than in many provincial centres.

The idea of a 'snap-back' to the City - decentralisation in reverse - has a seductive logic. Better space at lower rents, with the cachet of a City address, the benefits of a central location and the prospect of lower rates after revaluation in 1995: who could resist it? Well, the fact is that big space users are resisting it in droves - or perhaps, in the depths of recession, they're not even allowing themselves to think about it.

Michael Soames, one of the best-known faces among City estate agents, is keenly aware that rents for offices around the M25 can be as high as £30 per square foot while he can find space for office users in 'a significant City location' for as little as £15. But life is never that simple.

Now head of central London agency for Knight Frank and Rutley, Soames points out that many of the large corporate tenants are in 'lease jail', having signed up for as long as 25 years. Even if they could bear the costs of relocation in recession, they will find it as difficult as anyone else to assign their leases to other tenants because demand has slumped almost everywhere - and the City is a very specific market.

Soames feels that, 'There are relatively few types of businesses that really need to be in the City: banking, insurance, stockbroking and all of their associated companies like lawyers. Some big corporations do need to have access to bankers, lawyers and so forth ... those that still operate in a physical market rather than an electronic one, those that have a need to press the flesh.' And since the higher rates were phased in, the widely expected lower rates are likely to be phased in as well. With refreshing honesty and not a little insight, he says: 'The thing that is going to drive any property decision in a recession is going to be the business. The question is: Can your business make more money by being in London than in Cheltenham, or wherever you are now?' The answer for small and growing businesses is 'probably'. Gerald Blundell, an economist by training, and now partner in charge of investment strategy at Jones Lang Wootton, says: 'Small business cannot afford to internalise customer care like the big companies can. They have to be near their clients for their clients' convenience. In London they can head-hunt staff, they can afford to employ staff using public transport, they don't have to run a staff canteen, they can get space whenever they need it. For them, London is a nice big warm compost heap of a place.' A big company, on the other hand, tends to institutionalise what it does, to standardise its business as a way of leveraging more profit out of it - and once you've done that, there's no real reason to be in the centre, which is why organisations like the DVLC can move to Swansea. In fact, Blundell says, many of the plus points for small companies, can be easily reinterpreted as negative points for the large ones.

Even so, the rate of decentralisation is slowing down: 36 organisations moved 13,867 jobs out of the capital in 1991; 23 moved 10,938 jobs out in 1992; and only 14 are scheduled to move in the next four years. Lease jail is one factor: but falling rents in the capital have eroded whatever cost savings might be made in a move - and, according to Jones Lang Wootton, more than half of the companies that moved out of London in 1992 were doing it to save money.

The published decentralisation figures tend to concentrate on big space users: small start-ups and companies moving only a handful of people barely register, although collectively they occupy millions of square feet - a fact recognised by developers who have recently broken up large office developments into relatively small units. The idea that low rents could create a 'snap-back' of small and statistically invisible companies is amusing - but as things stand we'll probably never know whether it happened or not.

A curiosity in all of this, is that London Docklands has managed to pulled in 10 major space users employing more than 4,000 people in the last six months.

Most of those jobs, 2,900, have gone to Canary Wharf with Credit Suisse First Boston and Texaco.

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