Why Does London Have So Much Empty Space?

[M II A II R II K]

Why Does London Have So Much Empty Space?


OCT 3, 2018

By FEARGUS O'SULLIVAN

Read More: https://www.citylab.com/solutions/20...spaces/572011/

.....

The U.K. capital may be undergoing a housing affordability crisis, but it still has a staggering amount of vacant commercial space, as well as land approved for building where no work has yet started. So says a report released today by British think tank Centre for London, which reveals just how much of London’s space is being left unused.

- Across the city, over 24,000 commercial properties are vacant, more than 90 percent of them having been so for six months or more. The amount of land given planning approval where development has not actually begun, meanwhile, reaches up to 2,700 hectares, or 6,672 acres. That’s equivalent to nearly eight times the size of New York’s Central Park, effectively stuck in limbo within London. Given the hunger for space in the city, this stasis is perplexing. So what’s causing it?

- The report isolates several reasons. Developers’ over-optimistic planning is partly to blame. Commonly, they clear development sites of tenants only to find that the actual process of getting work started takes longer than expected—months, even years. There’s also a lack of information for prospective tenants on where the empty units are. London’s boroughs are not currently obliged to publish a register of unrented units and developers can lack the will or means to reach out to prospective users.

- Another hurdle is regulatory. An act dating back to 1954 bans commercial tenants from subletting unused parts of their premises to other tenants at a reduced rate. This means that businesses often leave unneeded space empty, when it could in fact be productive. Finally, there’s another possible reason for the high vacancy rate one not mentioned by the report, but which is a widespread topic of conversation in British public life. That’s the phenomenon of land banking, in which developers buy land parcels with the intention not of developing them but of using them as a speculative good.

- There’s a growing public awareness of land banking in Britain, so much so that politicians across the political spectrum are now at least paying lip service to the idea of ending it. Ironing out kinks in the development process could free up space for use (and make land banking less attractive), but some vacancy is still inevitable. It’s to this end that the report advocates what it calls “meanwhile use.” That means signing over of more London real estate for short- and medium-term occupancy, typically at lower rates.

- London, like many cities, already sees some of this activity, in the form of the pop-up businesses, such as the container parks that spring up on some development sites. Many otherwise vacant buildings are also occupied by property guardians—tenants who keep vacant buildings in good condition by living in them on (very) short-notice tenancies, and in return get a lower than average rent. London needs to make it easier for landlords to get involved in this kind of medium-term tenancy, to ensure that the city has the kind of flexible, transient space that helps spark its economic and cultural resilience.

- The mayor, the report suggests, could even create an award for the most inventive, socially sustainable plan for using a “meanwhile” site. This seems highly sensible, but there is still cause for caution. Encouraging “meanwhile” use with an overwhelming emphasis on making things easier for landlords could have serious pitfalls. It risks privileging the needs of landlords over tenants, providing extra avenues for developers’ profit without necessarily providing a secure enough basis for the people using their properties to thrive.

- The report partly addresses this issue—by advocating for clearer, rigorously enforced “exit agreements.” These would be contracts for interim tenancies with relatively standard terms that could, if properly worded and policed, create a degree of security and more concrete expectations for both landlords and tenants. A universally agreed code here that is enforceable by the city could indeed increase confidence in short- and medium-term lettings for London buildings. And if London can create a system that ensures tenants don’t get a raw deal, it could certainly help remove the anomaly of offices and warehouses lying vacant.

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A non-permanent space at the Movement, a new mixed use development in Greenwich, Southeast London. (U+I)

[montréaliste]

An excellent source of property bubbles.

As long as developers and land and property owners are given free range to extort "market price" leases in residential and commercial properties, the fallow commercial tenancy is not going to burden them a bit.

What, me worry?

[10023]

Originally Posted by montréaliste

An excellent source of property bubbles.

As long as developers and land and property owners are given free range to extort "market price" leases in residential and commercial properties, the fallow commercial tenancy is not going to burden them a bit.

What, me worry?

This post makes no logical sense. And one of the problems is actually the opposite of what you suggest.

To the extent land-banking is an issue, it is because the cost of keeping property “fallow” is low and the barriers to maximising its value today are high.

Generally the former problem is more acute in the UK because transaction taxes (stamp duty) are high and ongoing property taxes are low to non-existent. If there’s no mortgage on a property, it doesn’t cost the owner anything to hold onto it. And so they do. Only if they sell does this trigger big taxes for buyer and/or seller. This is of course by design in a country where a lot of powerful families have substantial real estate assets but modest income otherwise.

The other problem is actually the strength of tenant protections. Much as labor laws which make it difficult to fire employees also keep companies from hiring more employees (who will be difficult to get rid of when they’re no longer needed), tenant protections that make it hard to raise rent or evict tenants lead to more land banking.

It’s pretty simple really. If I know a chunk of office space is worth $100k/month, I’m not going to sign a 10-year lease with a tenant at $70k/month. I’d rather let the property stay vacant for months or even years. But if I’m allowed to sign someone up to a one year lease that can be terminated by either party with two months’ notice, and the monthly rent is renegotiated each year it’s renewed, then I probably would be willing to fill that space for $70k for now, until I find someone willing to pay more. For a landlord, taking a $30k/mo rent cut for a one year lease costs $360k, and for a 10 year lease it costs $3.6 million. The former is equivalent to about 3.5 months of vacancy, and the latter is 3 years of vacancy. If the latter is all you’re allowed to sign, it’s no wonder you see properties sitting vacant for a year or more. For the tenant, rather than bitching about being forced to move after a year, be happy that you got a year of below-market rent.

[Jonesy55]

A Land Value Tax instead of current business rates /Council tax /stamp duty on property transactions would go a long way towards encouraging owners to make make the best use of their land imo...

[10023]

Originally Posted by Jonesy55

A Land Value Tax instead of current business rates /Council tax /stamp duty on property transactions would go a long way towards encouraging owners to make make the best use of their land imo...

Yes it would.

It would also mean that, as is the case in the US, little old ladies who have been living in a house for 40 years which is now worth millions will have to sell said house to cover the annual tax bill.

It would also spell doom for things like cultural institutions with enormously valuable central London buildings on which they’ve held the freehold for years (unless there is a no doubt ever-growing list of exemptions). Or any business that can only survive economically because they own the freehold. If you think pubs are in trouble now, just wait until they have enormous annual tax bills to pay.

There are always trade offs.

I think the “meanwhile use” concept is a good one. But it means acknowledging that a tenant who’s given a great deal to occupy a space temporarily is, in fact, only a temporary occupant.

[Jonesy55]

Yeah, there are always issues. In the little old granny case for example you could let her stay in her house and defer the tax until she departs the world if her income isn't sufficient to pay the LVT, but then it gets reclaimed after she dies with interest or indexation and knocked off the windfall her kids or the local cat sanctuary will get from receiving her property.

For big public institutions like universities or museums they are usually funded in some way or another by the public purse so I'm sure some kind of accounting trick could help them, they pay more each year, the government gets more money each year, the government increases their annual funding to pay for that.

Pubs already complain about the current business rates system, if they would pay huge additional amounts under an LVT that probably means they are located in very wealthy areas, so they might just have to charge more, £10/pint coming soon to Central London pubs!

Seriously though there will always be winners and losers from any major change like that but I do think that overall an LVT system would be more economically efficient than the current setup, with more winners than losers. Whether it's politically feasible is another question.

[whatnext]

Can someone explain to me how the UK government can bitch and moan about the egregious actions of Russians poisoning people in the UK willy-nilly, yet does nothing to slow the flood of Hot Russian Money into the country's property market?

[10023]

Sorry Jonesy, but none of your suggestions work (e.g., everyone would find a way to defer tax, and then it wouldn’t achieve the objective), and the things you dismiss as “not a big deal” are in fact a big deal.

What would really happen is that real estate values would crash through the floor. There’s absolutely no way that any government does that on purpose. Probably not even the Corbynites.

Originally Posted by whatnext

Can someone explain to me how the UK government can bitch and moan about the egregious actions of Russians poisoning people in the UK willy-nilly, yet does nothing to slow the flood of Hot Russian Money into the country's property market?

Because all of those Russians are paying a 7% stamp duty on their property purchases, and because keeping the air from flowing out of the property bubble too quickly is one of the government’s top priorities (see above).

There is a new enforcement power that came into effect this year though, called an Unexplained Wealth Order:
https://www.bbc.co.uk/news/world-44954587

[montréaliste]

Originally Posted by 10023

This post makes no logical sense. And one of the problems is actually the opposite of what you suggest.

To the extent land-banking is an issue, it is because the cost of keeping property “fallow” is low and the barriers to maximising its value today are high.

Generally the former problem is more acute in the UK because transaction taxes (stamp duty) are high and ongoing property taxes are low to non-existent. If there’s no mortgage on a property, it doesn’t cost the owner anything to hold onto it. And so they do. Only if they sell does this trigger big taxes for buyer and/or seller. This is of course by design in a country where a lot of powerful families have substantial real estate assets but modest income otherwise.

The other problem is actually the strength of tenant protections. Much as labor laws which make it difficult to fire employees also keep companies from hiring more employees (who will be difficult to get rid of when they’re no longer needed), tenant protections that make it hard to raise rent or evict tenants lead to more land banking.

It’s pretty simple really. If I know a chunk of office space is worth $100k/month, I’m not going to sign a 10-year lease with a tenant at $70k/month. I’d rather let the property stay vacant for months or even years. But if I’m allowed to sign someone up to a one year lease that can be terminated by either party with two months’ notice, and the monthly rent is renegotiated each year it’s renewed, then I probably would be willing to fill that space for $70k for now, until I find someone willing to pay more. For a landlord, taking a $30k/mo rent cut for a one year lease costs $360k, and for a 10 year lease it costs $3.6 million. The former is equivalent to about 3.5 months of vacancy, and the latter is 3 years of vacancy. If the latter is all you’re allowed to sign, it’s no wonder you see properties sitting vacant for a year or more. For the tenant, rather than bitching about being forced to move after a year, be happy that you got a year of below-market rent.

Yes, I'm happy about the reasons for holding that low income but land-asset rich folks have in England but if this explains the massive vacancy, then it begs a lot of questions.

Why, for instance, does a healthy premium market have a massive vacancy rate and not call the buiding boom a bubble when similar conditions exist in less expensive cities?

The artificial conditions seem to be reasonable only when the market driven is near or at the center of decision making, is it not?

So, the proprietor is set on a commercial rent, deeming it worth 100k for a space to be fallow for 5 years at a demand rate of 70k? Does this make actual sense to you?

Your flip argument is that both the proprietor and ultimate buyer of the building will be punished with strong capital taxes if the property is sold. But is that the only option out of leasing at an equitable demand rate?

[mhays]

Is there a massive vacancy rate? The OP article doesn't use percentages so it's hard to tell. Or maybe I just don't speak British CRE.

[10023]

^ No, not really. Certainly not for office space, where Class A vacancy in central London is about 3.5% (slightly above the long-term average, but pretty low).

I’m not actually sure what data this article is being premised upon.

Originally Posted by montréaliste

Yes, I'm happy about the reasons for holding that low income but land-asset rich folks have in England but if this explains the massive vacancy, then it begs a lot of questions.

Why, for instance, does a healthy premium market have a massive vacancy rate and not call the buiding boom a bubble when similar conditions exist in less expensive cities?

The artificial conditions seem to be reasonable only when the market driven is near or at the center of decision making, is it not?

So, the proprietor is set on a commercial rent, deeming it worth 100k for a space to be fallow for 5 years at a demand rate of 70k? Does this make actual sense to you?

Your flip argument is that both the proprietor and ultimate buyer of the building will be punished with strong capital taxes if the property is sold. But is that the only option out of leasing at an equitable demand rate?

I’m trying to parse this as best I can, knowing that English is not your first language. Are you trying to say that landlords should just cut prices to fill space? That’s not how this works.

Firstly, there is no massive vacancy. But the point I’m trying to make (and that you are not understanding) is that the strong protections that exist for tenants mean that yes, leaving a property fallow IS preferable to renting it at a reduced rate. That’s the whole problem.

If I can get 100k from the right tenant, then I’m not going to give someone a 10-year least for 70k. That would be stupid. I might give someone a 1 year lease for 70k (perhaps with a 6-month break clause), if I know that if I line up another tenant for 100k, then I can kick out the cheaper tenant.

There are also financing implications. The appraisal of the value of the property is going to be based on a cap rate assuming 100k rent. Even if the property is currently untenanted, that valuation stands. If I sign a long-term lease for 70k, then the valuation gets marked down. Not only am I bringing in 30% less monthly rent, but the value of the asset goes down by 30%, and that might put mortgages or other liens into default. You can’t do it.

[10023]

Maybe the article is talking about retail space? That’s a sector that has been under a lot of pressure, with all the mass market high street chains getting Amazon’d.

https://www.ft.com/content/efafd85a-...f-ee390057b8c9

[10023]

Ok, here’s the actual source document:

https://www.centreforlondon.org/wp-c...Use_Report.pdf


These guys are talking about having pop-ups in disused theatres and things. Not really at all what most people are assuming. They don’t offer much data and the data they do have is unconvincing (51 “meanwhile use” sites in a city the size of London is basically nothing. It’s an interesting aside, at most).


Anyway, as a general matter, the ability to sign very short leases and tenant rights to sublet space (rather than having to hold it empty to provide room for future expansion) would of course provide additional supply, but at a cost to so-called “tenant rights”.

Reduced flexibility for owners always increases vacancy, whether one is talking about property or jobs.

[montréaliste]

Originally Posted by 10023

^ No, not really. Certainly not for office space, where Class A vacancy in central London is about 3.5% (slightly above the long-term average, but pretty low).

I’m not actually sure what data this article is being premised upon.


I’m trying to parse this as best I can, knowing that English is not your first language. Are you trying to say that landlords should just cut prices to fill space? That’s not how this works.

Firstly, there is no massive vacancy. But the point I’m trying to make (and that you are not understanding) is that the strong protections that exist for tenants mean that yes, leaving a property fallow IS preferable to renting it at a reduced rate. That’s the whole problem.

If I can get 100k from the right tenant, then I’m not going to give someone a 10-year least for 70k. That would be stupid. I might give someone a 1 year lease for 70k (perhaps with a 6-month break clause), if I know that if I line up another tenant for 100k, then I can kick out the cheaper tenant.

There are also financing implications. The appraisal of the value of the property is going to be based on a cap rate assuming 100k rent. Even if the property is currently untenanted, that valuation stands. If I sign a long-term lease for 70k, then the valuation gets marked down. Not only am I bringing in 30% less monthly rent, but the value of the asset goes down by 30%, and that might put mortgages or other liens into default. You can’t do it.

10023, I know you are a person of quality, you make the point on a regular basis, but your logic is based on the premise that a building owner is wealthy enough to forfeit the rent on a given commercial space.

The logic of paying a mortgage on a space that should bring in 100k yearly, and leaving it empty for 3 years is that the value of the asset will drop 30% from a target rate of 100k, and the ownership is then jeopardized.

It seems to me that the owner of a space will probably be paying taxes, and not a significant debt on such a building, if at all.

[mhays]

A new tenant can be a big expense for the landlord too because they commonly pay a large percentage of the initial tenant improvement cost. I don't deal with this stuff directly, but I believe this often exceeds the first year of rent. So no, a new tenant commonly doesn't pay off in the short term. If they don't want to upgrade anything, maybe it's cash-positive right away.

As for 3.5% office vacancy...wow! In my region anything under 10% is an outstanding market, and things are going nuts with vacancies around 7% currently.

[10023]

^ It depends on the source of course. This one from JLL has Central London around 5% and the prime West End sub-market around 4%. Less prime East London, which has seen tons of construction and also includes Canary Wharf (which is already being slammed by Brexit), is closer to 9%. Another source might only include the West End and City (“prime” areas), draw borders differently etc.

http://www.jll.co.uk/united-kingdom/...02018%20SP.PDF

Originally Posted by montréaliste

10023, I know you are a person of quality, you make the point on a regular basis, but your logic is based on the premise that a building owner is wealthy enough to forfeit the rent on a given commercial space.

The logic of paying a mortgage on a space that should bring in 100k yearly, and leaving it empty for 3 years is that the value of the asset will drop 30% from a target rate of 100k, and the ownership is then jeopardized.

It seems to me that the owner of a space will probably be paying taxes, and not a significant debt on such a building, if at all.

And the bolded statement is generally the case.

Foregoing rent creates a cash flow issue. Rebasing rent at a lower level creates a balance sheet issue. Especially if reducing the rent on some of their square footage creates an expectation that prices will come down for the rest of the portfolio as leases renew, as well.

And no, if you’d been paying attention, you’d have read that the owner of a building would not be paying taxes. Taxes in the UK are paid upon the purchase of real estate (stamp duty), and not on an ongoing basis. But any professional landlord will probably have mortgage debt on a property. Even if the original financing has long been paid off, they will usually re-mortgage, both because this is more efficient from a cost of capital perspective, and to pay for improvements, and to re-deploy capital into the purchase of additional properties.

Only economically illiterate elderly people (and perhaps debt-averse Germans) will pay off their mortgage and leave a property debt-free.

[montréaliste]

Originally Posted by 10023

^ It depends on the source of course. This one from JLL has Central London around 5% and the prime West End sub-market around 4%. Less prime East London, which has seen tons of construction and also includes Canary Wharf (which is already being slammed by Brexit), is closer to 9%. Another source might only include the West End and City (“prime” areas), draw borders differently etc.

http://www.jll.co.uk/united-kingdom/...02018%20SP.PDF



And the bolded statement is generally the case.

Foregoing rent creates a cash flow issue. Rebasing rent at a lower level creates a balance sheet issue. Especially if reducing the rent on some of their square footage creates an expectation that prices will come down for the rest of the portfolio as leases renew, as well.

And no, if you’d been paying attention, you’d have read that the owner of a building would not be paying taxes. Taxes in the UK are paid upon the purchase of real estate (stamp duty), and not on an ongoing basis. But any professional landlord will probably have mortgage debt on a property. Even if the original financing has long been paid off, they will usually re-mortgage, both because this is more efficient from a cost of capital perspective, and to pay for improvements, and to re-deploy capital into the purchase of additional properties.

Only economically illiterate elderly people (and perhaps debt-averse Germans) will pay off their mortgage and leave a property debt-free.

Yes, is that how you manage debt on your property/properties?

[10023]

Originally Posted by montréaliste

Yes, is that how you manage debt on your property/properties?

Is what?

[suburbanite]

Are mutual termination rights not common/not allowed in the UK?

If I have a building here that we know is not realizing it's full value, every lease is going to start with a termination rite at the landlord's sole discretion. Either because you want to redevelop, sell, or realize future market rates. In a hot market you can often get that to stick since the tenants are pretty much at your mercy. If not you would move towards mutual termination rights and if you really had to, the landlord would pay off the unamortized cost of the improvements the tenant made to the space upon termination.

So it sounds like in London, tenants are too well-protected in a long-term lease to give the landlords any sort of flexibility? Then on the flip side is there just no appetite for smaller tenants to take on the risk of a short-term lease?

[montréaliste]

Originally Posted by 10023

Is what?

Do you own property(ies) in London or elsewhere?