ctbuh.org/papers Title: Office vs. Residential:The Economics of Building Tall Authors: James Barton, Director, Davis Langdon Steve Watts, Global Head of Tall Buildings, Davis Langdon Subject: Economics/Financial Keywords: Economics Office Residential Publication Date: 2013 Original Publication: CTBUH Journal, 2013 Issue II Paper Type: 1. Book chapter/Part chapter 2. Journal paper 3. Conference proceeding 4. Unpublished conference paper 5. Magazine article 6. Unpublished © Council on Tall Buildings and Urban Habitat / James Barton; Steve Watts Economics/Financial Offi ce vs. Residential:The Economics of Building Tall When it comes to tall buildings in London, the sky’s the limit, and not necessary in terms of height. With rents among the highest in the world and investors eager to see strong returns, the incentive to maximize floor plates, as well as the diversity of uses, has never been greater. Introduction and price stagnation that is evident elsewhere in Greater London and the rest of the United James Barton Steve Watts London: Capital of Asia? That was the provoca- Kingdom. It has seen not only extraordinary tive title of a debate held at MIPIM in early price increases (30% more than elsewhere in Authors March this year, the annual jamboree of the the capital) but also an expansion beyond the James Barton , Director property industry in Cannes, France. It was traditional prime districts of Knightsbridge, Davis Langdon, an AECOM company Mid City Place, High Holborn prompted by the signifi cant fl ows of foreign Mayfair, and Belgravia into new areas along the London WC1V 6QS money that have been pouring into London in South Bank of the Thames and further afi eld. United Kingdom recent years, as the UK’s capital benefi ts from its Residential values in London are now amongst t: +44 207 061 7000 sophisticated market, quality of product, status the highest in the world, fueled by this foreign f: +44 870 048 6055 e: [email protected] as a leading fi nancial center and the inherent investment and limited supply. Many inner www. Davislangdon.com advantages of its location, time zone, legal London schemes are achieving £1,000/ft2 system, and relatively stable political environ- (£11,000/m2) sales now – considered a “prime” Steve Watts, Global Head of Tall Buildings ment. “It is a safety deposit box” for interna- value not that many years ago. At the other Davis Langdon, an AECOM company Mid City Place, High Holborn tional investors, Peter Rees, the City’s Chief end of the scale, super prime achieves between London WC1V 6QS Planning Offi cer has commented. £2,500 and £5,000/ft2 (£27,000 and £54,000/ United Kingdom m2). But it does not stop there: Candy and t: +44 7818 424 484 Lack of residential stock is fueling demand too, Candy’s One Hyde Park reportedly topped the e: [email protected] 2 2 www.alineaconsulting.com which, combined with high land prices, is the £7,000/ft (£75,000/m ) mark, and high-end reason why high-rise living (and investment in “specials,” like the apartments at the top of the it) is becoming increasingly popular. As Matt Shard at London Bridge will surely be striving at James Barton James Barton is a Director within the London Oakley of Savills says: “People are prepared to values towards this peak. Commercial Real Estate and Residential team at pay to own a piece of one of London’s towers, Davis Langdon. Since joining Davis Langdon as a graduate over eighteen years ago, James has spent and the recent completion of The Shard has Given all this, and the fact that a large majority the majority of his career focusing on the leadership whet the appetite of investors for building of purchases tend to be in cash, it is not and delivery of complex residential mixed-use and commercial schemes, including working on upwards.” surprising that the portfolios of many London a signifi cant number of high-profi le tall buildings developers include proposals for high-rise, globally. James’ understanding of the key success factors and design related cost drivers, particularly on While the array of new residential towers has high-value residential towers. And with offi ce tall buildings, combined with his work as a member been getting much of the headlines in this values, in real terms, no diff erent to the levels of AECOM’s tall building group, enable James to provide expert consultancy advice to clients around respect – with reports of developments such as they attained some twenty years or so ago, the world. Battersea Power Station selling their substantial there are a number of offi ce-led developments available lots off -plan to predominantly Asian that are incorporating a residential element, Steve Watts Steve Watts led Davis Langdon’s and AECOM’s global buyers in a matter of days – most landmark sometimes in the same building, creating a tall buildings groups for several years, combining a commercial towers in central London enjoy new typology of mixed-use tower. passion for research and innovation with a hands-on approach to projects. His CV includes landmark majority overseas backing. A Savills study has buildings from the HSBC Headquarters at Canary suggested that in central London 44% of Rewind a decade or so, and not only was the Wharf to the Shard at London Bridge and the Leadenhall Building in the City of London – as well as new-build residential developments are residential landscape quite diff erent, but the tall a number of international commissions. purchased from Asia; the comparative fi gure for commercial scene was almost unrecognizable Steve is a trustee of the CTBUH, UK Country Leader the offi ce market is 24%, a signifi cant number compared to today’s changing skyline. It is easy for the Council and heads its Finance & Economics Working Group. From May 7, 2013 he will be part itself. to forget the heated debates and polarized of a new venture that focuses on excellence in cost views surrounding the appropriateness of tall consulting: Alinea Consulting. The Central London offi ces market is by far the buildings in London, largely in terms of offi ce strongest performer in national terms, with tower proposals. Heron Tower led the way with capital values supported by this foreign its diffi cult passage through a public inquiry, investment. The prime residential market in but the Gherkin still courted controversy, with London has resisted the volatility in demand UNESCO worried about its impact on St. Paul’s 38 | Economics/Financial CTBUH Journal | 2013 Issue II Cathedral, and the Shard had to negotiate its Such a correlation is less clear in the commer- pavement-to-door “look and feel,” brand own public inquiry. Now they are being joined cial offi ces world. Rental fi gures for a certain association; and amenities such as members’ by other landmarks like the Leadenhall Building established landmark tower suggest an club, spa, childcare center, concierge facilities, and 20 Fenchurch Street, not to mention a host increase in rental levels higher up the building, etc. of other proposals both in and outside the but a number of agents have remarked that public realm, and the time, expense, and risk the lower fl oors were let fi rst, and by the time involved in such challenging projects is repaid the higher levels were negotiated, there was a The Cost of Creating Value (it is hoped) by the value of increased fl oor area premium attached to their exclusivity as well as on constrained plots, high-quality buildings, a general uplift in the market. Lies, damned lies There may not be an exact correlation between imaginative forms and a variety of fl oor plates. and statistics. There can be little doubt that a sales values and fi t-out costs in residential Tenants will no doubt appreciate all this, as well tall offi ce building attracts a premium of some developments. Each scheme will introduce its as the view, the attraction and retention of staff , nature, but articulating what that is, and how it own idiosyncrasies as marketing strategies or the address, and the sharing of a high-quality relates to particular levels, would seem to be diff erentiators. However, there is a general infrastructure with other like-minded less than straightforward. trend that demonstrates a relationship organizations. between the two key drivers (see Figure 1). Enhancing that Value As a rule of thumb, apartment fi t-out costs The Value of Height equate to about 10% of sales values (above a Traditionally, the offi ce product does not really sales value of £1,000/ft2 or £11,000/m2 ). As with There are a number of drivers for tall building change with height. While residential all rules of thumb, this is open to challenge, but development, from city competition – some- developers will alter the fl oor plates and size of the fairly tight range displayed in Figure 1 does times encouraged by governmental incentives, apartments on the highest fl oors, locating give this some credence. That said, there are as is evident in the Pudong and Canary Wharf duplex or even triplex penthouses there to ways to underpin value by creating a quality enterprise zones of Shanghai and London, underpin the price premium, the offi ce fl oor product in more cost-eff ective ways – for respectively – to sheer ego. But almost without plate tends to be less diff erentiated. Planning example, through smart-sourcing of exception, towers are built equations founded and architectural infl uences may drive a components and intelligent procurement. on the development appraisal at its most tapering or reducing form, which lends itself to fundamental: value less cost equals profi t – more boutique operations or executive The value and cost of fi tting out is much less of whether they are commercial offi ce or functions, but the marginal value of this a consideration for offi ce developers, whose residential apartments.