A record number of objections have been lodged against a planned new office development on London Wall in the City of London. The proposed scheme, by developer Hammerson, comes up for decision on Monday 27 June, but a report in architectural weekly Building Design suggests it might have a rough ride at the planning committee meeting.
So, which way will the decision go?
Hammerson will be hoping it’s second time lucky. The last proposal for this site was to build a one million sq ft headquarters block for JP Morgan. They went through all the grief of engaging with the Barbican residents, a very vociferous bunch, and trying to accommodate their needs, only to have the financial crisis rob them of their potential tenant. In the fallout from the crisis, JP Morgan ended up buying an empty office block in Canary Wharf, and will be moving there before too long.
The JP Morgan building was criticised for being too big and bulky. The current proposal is much less so. But still, the residents of the Barbican would rather it was smaller still. Hammerson, as a commercial developer, have tried hard with architects Make to design something that doesn’t look all big and bulky, but still delivers a useful amount of new office space.
The problem is, if the residents get their way, Hammerson may well give up, and leave the current derelict 1960s tower block in place. And the City Corporation will stiffen further its resistance to Government plans that would allow offices to be converted to residential use without permission. The corporation tries to maintain the City as a global financial centre that is attractive for businesses, and has always jealously guarded the fact that it can plan new buildings without much squabbling from residents – because there simply aren’t many in the square mile.
In the last few weeks, logic prevailed when culture secretary Jeremy Hunt decided not to bow to pressure from English Heritage to list buildings at Broadgate. Let us hope it will again do so with these plans to bring London Wall into the 21st century.
At the end of last week, English Heritage recommended that the Broadgate office complex in the City of London should be listed. Whatever happens next, this is bad news – for Broadgate’s owners, for Swiss bank UBS, and for London as a leading financial centre.
It’s lousy timing. The planning committee of the City Corporation has recently given permission for the demolition of Broadgate buildings 4 and 6, to be replaced by an impressive new block, designed by architects Make specifically to house UBS. Demolition was to start soon, just as soon as the last tenants moved out of the existing buildings.
The redevelopment will, at the very least, have to be put on ice for two months until culture secretary Jeremy Hunt declares whether to go with the EH recommendation, or not.
The possibility of this listing should also ring alarm bells for the many international investors who have been investing money into commercial property in London. Never mind the risk of your tenant going bust – what about the risk of your building being set in aspic, unable to be renewed?
So let’s spin forward two months, were Mr Hunt to decide that grade II star listing of the existing Broadgate buildings is a good idea. What would that mean?
1) It will stunt the future development of Broadgate
For a start, the presumption would be that any future changes to the exterior appearance of Broadgate buildings would be restricted and minimal. They would need not only planning permission, but listed building consent too. Which would leave the building’s owners with limited options. They could refurbish the interiors of the existing structure; or try to get permission for a redevelopment, which would probably only be entertained behind a retained facade.
Refurbished office space, however well it is refurbished, always attracts a lower rent than new office space; it is also likely to be more expensive to maintain, as it’s not within a structure built to the latest energy efficiency standards. A redevelopment which retained the existing facade would mean a compromise in terms of ideal floor to ceiling heights, and restrict the opportunity to add floors or widen floorplates. There’s plenty of other brand new office space being built, or with permission to build, around the City, so a listing would be a financial disaster for Broadgate’s owners.
2) Important companies will mark the City of London down as a business location
What of UBS? They would probably walk from Broadgate, where their current lease obligations are coming to an end. They might well find suitable brand new office space elsewhere in the City of London, where they have been a committed occupier for the last 25 years. But, if the frustration of planning your new European HQ – only to have it taken from you – is too much to bear, UBS could be off to another, more business-friendly city elsewhere in Europe, such as Frankfurt or Paris.
There could be a knock-on effect, too, on building values, if foreign investors begin to worry their buildings could be listed as well. And that wouldn’t be good news for British pension funds, who have some of their funds invested in UK commercial real estate.
3) It would mean retaining buildings which aren’t that great, are they?
But back to the buildings – are they worthy of being listed? The treat is usually reserved for buildings of high architectural quality. But according to the City Corporation’s planning chief Peter Rees, the Broadgate buildings 4 and 6 are merely pastiche architectural design, watered down with veneers of stone after architect Peter Foggo’s initial concepts were considered too daring for the conservative Square Mile. “To the great chagrin of Peter Foggo – we said the buildings would never get permission unless they were clad in stone,” he told the City planning committee in April, when they approved the UBS redevelopment.
This time around, the story making the national press is all about care homes, and what will happen to the old folk in them if Southern Cross goes bust. The care home operator is in trouble, squeezed by tightening income on the one hand, and substantial operating costs on the other; with the latter including property costs invariably set against massive lending somewhere along the line.
But behind this worrying tale is a repeat of so many other recent stories about banks and property companies investing in an unsustainable – or barely sustainable – bubble. Banks were happy to lend, and property people happy to do deals, confident about (or blind to) the belief in a steady, rising income stream that would cover the costs over the long term.
The thread is common to several companies in recent years who bought, and borrowed against buildings. There were pubs, which once saddled with debt were then passed on to would-be landlords who could never sell enough beer to cover the rent; and plenty of one-off buildings, such as the Citypoint office tower in central London, bought in the good times and cranked up with £535m of debt, now worth probably 20% less than that and with rental income failing to cover interest payments. But these tales had less to do with old, vulnerable folk.
The big shift, according to a piece in the Financial Times, is that local authorities worked out not only did people prefer to stay in their own homes, it was actually cheaper to care for them there. So the income stream on which this house of cards was built, started to look shaky. Southern Cross occupancy fell from 91% in 2006, to 86% in 2010, according to figures published by Property Week.
And while it is only now coming to a head in the mainstream media, the Southern Cross story has been a car crash taking place in slow motion. Back in November 2009, it was reported that Southern Cross was flogging off the family silver – the freeholds of its care homes – to help reduce its debts. When the property market is strong, sale and leaseback may be a good strategy. At other times, it smacks of desperation.
Then, last September, the country’s third largest care home operator Four Seasons managed to extend a deadline to repay £500m of debt, by two years. In February this year, analysts were forecasting problems ahead, though they reckoned it would not be this year. Investec Securities analyst Sebastien Jantet said Southern Cross was “likely to be in breach of its debt covenant in the second half of 2012 and [will have] run out of cash with which to pay the landlords”. And here’s their prediction of the company’s future performance (originally published in Property Week).
There’s no quick fix, and Southern Cross will try to negotiate lower rents with the landlords of the care homes it has sold and now rents back. The deal is by no means done; on June 1, City AM newspaper reported that Bondcare, which owns 40 of Southern Cross’s premises, is not going to support a rescue proposal.