Commercial Property Development in London - Essay Example

"Discuss the main drivers for commercial property development in the central London area over the last 6 years. Have BIDS been a significant factor for good in this area. London is the capital city of the U.K. and England. At the same time, it is arguably the largest city in the European Union (Brueckner, 1990). The history of London dates back to more than two centuries, the city currently being among the most developed in the world. The city has witnessed massive growth over the years and has become one of Europe’s commercial herbs. In fact, the town is currently the leading financial centers in the world alongside New York City in the U.S. At the same time, the city has been described by many as a cultural center and is also one of the most visited cities in Europe and the world at large (Miles, Berens and Weiss, 2000). This is seen in terms of the many tourists that visit the city every year. London city also has some of the best infrastructural facilities in Europe such as the transport system, roads, railways, airports, and communication and education sectors among others. However, a report by Ball, Lizieri, and Macgregor indicate that the city has witnessed a faster growth of commercial properties in the recent past (2012). In this regard, the report showed that many property developers have been targeting central London as the best place to put up a commercial property. Nevertheless, this growth in commercial property, in London, is taking place at the backdrop of the recent financial crisis that did affect the U.K. adversely. Research has shown that the recent financial crisis of 2007/2008 did affect all the economic sectors in the nation including the property market, which dropped to an all-time low as many people could not afford to invest in commercial properties due to lack of enough funds required for the project. In fact, the U.K. is still struggling to recover from the effects of the financial crisis, by introducing measures aimed at improving the state of the economy such as opening up the country for investments. O’Kelly (2012) noted that the economy of the U.K. shrunk by about 4.9% in 2009 due to the effects of the 2007/2008 financial crisis. In fact, the economy of the U.K. has not been able to experience any significant improvement since then. Only recently, in 2012, did the economy registered a growth rate of about 1%. However, economists remain positive that the economy is on the right course and is likely to enjoy significant growth over the next few years. However, as earlier stated, central London has overcome all these odds and has been experiencing increased growth in commercial property development over the last six years. This follows the fact that many commercial properties have been put up within central London within this period, and many business property investors still target the city as their preferred area for commercial property development. A report released in 2011 by Cushman & Wakefield showed that commercial property investment in central London increased by about 34% during the first quarter (O’Kelly 2012). At the same time, the same report by Cushman & Wakefield indicated that the transaction at the capital during the first quarter also increased by over £1 billion dollars by registering £2.19 billion up from the £1.63 billion registered in the first quarter of the previous year according to O’Kelly (2012). This paper will explore the primary drivers for commercial property development in the central London in recent years. It will also examine the extent to which BIDS has been a significant factor for good in the central London. To begin with, high demand for commercial properties has been cited as one of the drivers of the increased development of commercial properties in central London (McCormack 2012). A study conducted in the city has shown that the demand for commercial properties in the city has exceeded the supply. As such, commercial property developers have found central London as a favorable place to invest in commercial property. In fact, research has shown that central Europe is one of the most visited cities in the U.K. However, findings show that London has no enough houses and offices to accommodate the high number of visitors who come into the city either as international tourists or as business people. For instance, a report by the Financial Times in January this year showed that the increasing international demand for offices in central London generated about £14 billion into the real commercial property market in the year 2012 (McCormack,2012). Also, only a few numbers of offices are available from which investors who come into the city can rent. The shortage of the commercial houses saw prices of both offices and residential houses surge, thereby, making commercial property development lucrative to invest in (Wilkinson and Reed, 2008). As a result, many investors moved in with speed to cash on the increased prices of commercial properties and rentals in central London. The increase in commercial property development in central London has also been driven by the government’s move to provide incentives to commercial property developers in central London (Brueckner, 1990). It is an acknowledged fact that the current economic status of the country has made it hard for many people to afford the prices charged for the commercial properties in London. As earlier stated, the U.K. has not yet recovered from the effects of the financial crisis of 2007/2007. This is because the economy is still stagnant and experiencing very minimal or no growth at all. In fact, at some point, the economy decline to negative figures thus caring investments in the country. As a result, the government found it prudent to introduce incentives in the commercial market so as to attract investors in commercial property market so as to enable more houses to be put up to meet the growing demand for a commercial property being experienced in London (Becker, 2012). The low-interest rates charged for commercial property development in London is also a key driver for the commercial property development in central London. The increase in commercial property development in London has also been hugely attributed to the fact that the government has eased several legal restrictions on commercial property investment in the country. It is known that the U.K. is still suffering from the impacts of the financial crisis of 2007/2008. Therefore, one of the ways by which the country’s economy can be improved is by encouraging more investments in the country by removing certain legal restrictions on investments in the country. The removal of certain legal restriction of commercial property development has made it favorable for commercial property developers to invest in commercial properties in London (McCormack, 2012). Physical suitability is also another factor that has contributed hugely to the development of commercial property in central London. The report indicates that London is one of the best-designed cities in the world. However, the increased investment in central London has been attributed to the fact that enough land for property development is available in the city where commercial developers can put up housing units for the increasing demand that has been witnessed in the recent past. This has made it possible for property investors to purchase more land in the city for property development (Wilkinson and Reed, 2008). The growth in commercial property development in central London in the recent past has also been attributed to the projected economic growth expected in the future. So far, the government is still grappling with how to improve the economy of the country. This is evident from the financial controls that have been put by the Bank of England to ensure that inflation rates are kept as low as possible. Many investors, therefore, project that, with the measures in place, the economy is likely to improve in the country, which in turn will create more job opportunities for the residents of London and the entire country at large. Therefore, commercial property developers project that as more jobs will be created in the country, demand for commercial properties such as residential houses will increase. As a result, the property developers will be able to cash from the increased demand for residential houses in the city (Redmond, 2012). Security is another factor that influences investment decisions. As such, it is also seen as one of the drivers of commercial property developments in central London in the recent past. Many commercial property developers have cited political stability in the U.K. as one of the driving force behind their move to invest in commercial property in central London (Knight Frank. 2012). This is certainly true because London is one of the most democratic countries in the world that has witnessed minimal incidences of insecurity. The current state of political stability being experienced in the U.K. has created investor confidence in the country. Therefore, many commercial property developers have found central London as the best area to put up the commercial property, which has high demand presently. As earlier stated, London is one of the cities in Europe with the best infrastructural facilities. In this regard, London has goods road networks linking the city to the rest of the country. The city is also endowed with good social amenities, which, makes it an excellent place to leave in (O’Kelly, 2012). Therefore, the fact that London already has good infrastructure and social amenities in place has made it a good investment city for commercial properties. This is because its good status has attracted many people from different parts of the country, as well as tourists who come to visit the city. For instance, the report indicates that London city has witnessed increased growth in the number of tourists visiting London city over the recent past. The trend has also been projected to increase in the coming years thereby necessitating the development of commercial houses such as luxury hotels and offices to offer accommodation for tourists and international investors that increasingly continue to visit the country according to Redmond (2012). London was also lucky to have hosted the 2010 Olympic Games. This was despite the fact that the U.K. was facing a lot of challenges occasioned by the fact that its economy had stagnated following the recession. However, it is notable that the Olympic Games brought a lot of business and investment opportunities in the country. An upsurge of commercial property development was particularly witnessed few years after London won the bid to host the 2010 Olympics. Land Securities Group (2013) reported that this announcement was seen by many investors as a good investment opportunity in the country based on the fact that the games were going to attract many people from all over the world who were to gather in London for the whole period of the games. However, at the time, there were few commercial houses where the foreign visitors who come to London could get decent accommodation as the few that were available had been fully booked or sold out. This prompted many commercial property developers to target central London in order to cash in on the increased demand that was being brought by the Olympic Games in London (Miles, Berens, and Weiss, 2000). I fact this saw demand for land for commercial properties increase as investors moved with speed to ensure that enough commercial houses are put up before the start of the games. Therefore, the investment opportunity brought about by the Olympic Games in London in 2010 is a major driver to property development in central London in the recent past. Economists have also projected a future increase in commercial property leasing and space in central London (Smersh, Smith, and Schwartz Jr., 2003). The study found out that space and leasing of commercial housing in central London will increase by about double digits in the next decade. As a result, many investors have found it prudent to buy land in central London now in order not to be affected by the high prices that will be charged to either lease or buy space for commercial development in the next few years. Also, the developers of commercial properties in central London have also been occasioned by the fact that the mortgage rates in the country have been high in the U.K. following the financial crisis of 2007/2008. The high mortgage prices have invested in commercial properties a very profitable venture over the last few years (Mitchell, 2005). This has made many investors to borrow a lot of money from banks, which have also lowered their lending rates thereby resulting in increased commercial property development in central London. Finally, the growth of business in central London has also been cited as one of the main drivers for commercial property development in central London over the last six years (O’Kelly, 2012). The report indicates that the 2007/2007 financial crisis affected many businesses in London as some companies were forced to close down or reduce their operation levels. At the same time, many financial institutions such as banks, co-operative societies, and stockbrokers went bankrupt and were forced to close down apart from some few baking institutions that were bailed out by the government. However, the prospects show that the economy of the country will stabilize in the future and many people will be looking at commercial properties where to establish their businesses. However, businesses boom started being witnessed in central London soon after the financial crisis, and many people are already thronging the central part of London city in search for office spaces, as well as residential housing around the area (Global Property Guide, 2013). This rise in demand occasioned by the growth of businesses opportunity in central London is, therefore, a major driver for commercial development in central London. Have BIDS been a significant factor for good in this area The Business Improvement District has indeed played a central role in ensuring that the business environment in London is improved so as to promote trade, which is a major income earner for both the city and the country as a whole. This is based on the fact that that the 25 BIDS available identifies the needs of the local businesses community such as additional security, environmental measures, and cleanliness among others. Their activities are very crucial since they help shape the industrial estate and the local town centers across the U.K (Carmona, de Magalhaes and Hammond, 2008). The significance of BIDS activities has been felt in central as far as ensuring that there is business growth in the city. London is one among the cities that suffered most as a result of the financial crisis of 2007/2008, which saw business go down due to financial difficulties occasioned by high inflation and interest rates. However, BIDS have played a crucial role in e ensuring the central London remains a commercial business hub for the entire nation by ensuring that services within the city are improved. This is seen from the fact that BIDS has been working closely with the Greater London Authority (GLA) to ensure that there is enough security in the London city. Also, BIDS has been at the forefront in ensuring that the infrastructural facilities in the city and social amenities are maintained in good condition and improvements done where warranted so as to improve investor confidence in the city. BIDS has also worked tirelessly in ensuring that the city remains secure and tidy all the time. This has indeed seen London continue to receive many international tourists who continue to come in numbers because of the beauty of London city (Great Britain: Parliament: House of Commons: Communities & Local Government Committee, 2007). Central London has indeed experienced high growth in commercial property development over the past six years. However, many have been suppressed since the growth has been taking place at the backdrop of 2007/2008 financial crisis that has since brought the economy of the U.K. almost to zero digits. This is based on the fact that the economy of the U.K. had stagnated at negative growth rate since then until recently in 2012 when it registered a slight growth rate of 1%. However, several factors did contribute the high growth that has been registered over the past six years. The factors include among other things increasing demand for office and rental spaces in central London; increasing number of international tourists in the city who are looking for accommodation; incentives provided by the government and the removal of the certain legal restriction on investments in the city and the U.K at large. Other factors that have also been cited included the fact that investors have been projecting growth of the U.K. economy shortly, which will increase demand for housing units either for rental or office spaces in the central part of the city. Certainly, the U.K. government need to support such kind of investments in the London, as well as in other cities across the U.K. as this will help boost the economy, which has stagnated for a very long time now since the recent financial crisis of 2007/2008. Also, the U.K. government needs to provide more incentives for commercial property developers so as to encourage more investment in the country. Doing this will certainly help leverage the economy from where it is today. References Ball, M., Lizieri, C., & Macgregor B. D. (2012), The economics of commercial property markets. Oxford: Routledge. Becker, C. (2012), Commercial property estate agent, MERJS, releases details on central London office space in W1. 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Retrieved from: http://www.landsecurities.com/london-portfolio/london-commercial-property-market McCormack, T. (2012), Demand for Central London Offices at Pre-Crisis Level. Retrieved from: http://invezz.com/news/real-estate/1283-demand-for-central-london-offices-at-pre-crisis-level Miles, M. E., Berens, G., & Weiss, M.A. (2000), Real estate development principles and process (3rd edn). Washington, DC: Urban Land Institute. Mitchell, P. (2005), Real estate consultancy update of IPF report the size and structure of the UK property market. Residential property is based on the 2010 estimate from the Office for National Statistics Blue Book, updated to 2011 by Paul Mitchell Real Estate Consultancy. O’Kelly, S. (2012), New City residential developments reaching bold heights. The Telegraph. 21 Sept. 2013. Retrieved from: http://www.telegraph.co.uk/property/propertynews/9553418/city-residential-developments-heights.html Redmond, J. (2012), Central London Commercial Property Market Registering Higher Growth than Rest of UK. Movehut, 18 June, 2012. Retrieved from: http://www.movehut.co.uk/news/central-london-commercial-property-market-registering-higher-growth-than-rest-of-uk-5346/ Smersh, G. T., Smith, M. T. & Schwartz Jr., A. L. (2003), Factors affecting residential property development patterns. JRER, Vol. 25. No. 1, Pp. 61-75. Wilkinson, S., & Reed, R. (2008), Property development (5th edn). London: Routledge. Read More