Lex recently noted that the commercial property sector is in the doldrums with many landlords reporting significant valuation reductions (“Lab space cannot revive London’s office market”, Lex, May 4). The reasons are usually said to be the higher cost of debt and (in the office sector) the working-from-home phenomenon. The suggestion then follows that when debt costs fall, valuations will recover.
What is seldom mentioned is the impact of depreciation and obsolescence — the real elephant in the room — as illustrated by the recent announcement that in order to retain Morgan Stanley as a tenant at Canary Wharf the landlord has agreed to spend £150mn on refurbishing a 547,000 sq ft building — that is £274 per sq ft.
Separately, Citi has announced that it will spend £100mn refurbishing its Canary Wharf HQ and the 694,000 sq ft Gherkin is also scheduled for updating only 20 years after construction. Obviously all buildings age and with tenants demanding high-tech sustainable zero-carbon accommodation, landlords are facing very large capex bills if they are to retain tenants and preserve rental and capital values.
But where are these capex liabilities reflected? If a landlord has to spend £274 per sq ft every 20 years on a building rented at say £42.50 per sq ft, that is more than 6 years rent “lost” every two decades or 30 per cent of the headline rent.
These ageing buildings represent huge liabilities, and while this is most visible in the office sector, shopping centres and warehouses also need costly periodic updating if they are to preserve their rental and capital values. Do current valuations truly reflect these liabilities?
Peter Steward
Henley-on-Thames, Oxfordshire, UK