Sourcing finance to fund the development of a commercial property project without pre-lets or pre-sales in place has never been easy. In the years after the credit crunch it became close to impossible but at the same time companies became more reluctant to commit to pre-lets and if they were considering a pre-let they were also expecting better lease terms such as rent free periods and lower rents. This has meant relatively few commercial projects have been delivered except for certain prime office areas of London like the square mile where corporate tenants continue to demand high quality floor space.

 

In the background there have been some changes to planning regulations that have resulted in office space being lost. In Q2 of 2013 the changes in planning with Permitted Development Rights have made it much easier for developers to change office buildings into residential blocks. This has seen many office buildings in the Greater London area and across the UK be changed to residential use. This has worked particularly well for developers in desirable residential areas outside of Central London where the value of residential property is significantly higher than office premises. In many circumstances we’ve even seen property developers pay fairly substantial sums to commercial tenants to leave certain properties. In many cases the office buildings have had significant vacant space and / or been fairly tired looking office blocks, but a number of commercial tenants have been on the move as a result.

 

So for the last few years we’ve seen comparatively few new office buildings be developed but at the same time a large number of existing office buildings have been lost to residential development. We therefore share the view of some of our clients in that developing a spec office scheme may not been as high risk as it used to be and some funders are coming round to this idea as well. In most parts of London residential values will beat office space values but sometimes planning may not be on your side or planning may be more favourable if a mixed use scheme of office and residential was delivered. In these circumstances a level of funding should be available and in the right areas the level of demand for brand new office space should be strong.

 

We’re therefore expecting to see more speculative commercial development in 2015, particularly in certain parts of London, and believe the lenders will be there to support the projects. The key question from funders will be about the exit strategy so a lot of research will be required into the demand for office space in the specific location.

Newsletter    |    2014  Q4

FINANCE FOR COMMERCIAL DEVELOPMENT PROJECTS

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