London: A City through the Ages 

London – and the City of London in particular – has long been a significant node in the network of global trade. It helped pioneer the disembodied marketplace, where goods change hands without being physically present. The Metal Exchange is no more ferrous than the Baltic Exchange is wet. Traders themselves, however, were always physically present along with the lawyers, accountants and taverners who served them and this diversity of commonalities has made the City of London what it is today. The pandemic changed this. It has accelerated a move away from 'big business' meaning big buildings. This presents a potential problem for a commercial and financial hub like the City of London and the real estate investment market in particular. Core City assets have been perceived as a safe bet for decades. Is this about to change?

The Times They Are a-Changin'

To secure its future, the City will need to harness its traditional strengths as a global marketplace, deep talent pool and home of countless corporate and legal services and use these to attract new occupiers and visitors whose working habits and want of ‘experiences’ are perhaps entirely unlike those which have gone before. It will also need to invent new traditions: embracing technology and innovative ways of creating and occupying space to become a siren for start-ups and SMEs. This pivot, however, will not be without challenges, some of which we consider below:

• First, to convince institutional real estate investors in a City asset that a revenue stream need not be dependent on a blue chip occupier, but could instead rely on a menagerie of smaller tenants, often with weak or unproven covenant strengths but whose capacity for fast paced growth is unrestrained. Reduced tenant certainty is not without precedent: investors have become accustomed to average lease terms shortening dramatically in recent years. The growth of serviced offices may encourage willingness to explore new occupational models.
• Second, digital businesses require digital infrastructure. Occupiers are becoming increasingly demanding and need reliable high-speed connectivity. It is in the miles of cable, scores of antennae and wealth of other telecoms equipment that the virtual meets the physical and all this kit needs space within the Square Mile. Even when a suitable location is found, identifying ownership and gaining access for installation presents problems, particularly where property ownership structures are complex and opaque notwithstanding the continued relaxation of planning regulations to increase rollout. Coordination between developers, utilities providers and local planning authorities will be essential to deliver the necessary bandwidth. Indeed, as detailed elsewhere in this publication, these telecoms assets can provide investment opportunities in their own right.
• Third, how affordable workspace (a key component of attracting start-ups and SMEs into the City) is delivered through the planning system. Planning agreements between the local planning authority and the landowner regulate the delivery and use of affordable workspace. In this way, the local planning authority retains an interest in the ‘policy’ aspects but the owner (or developer) is responsible for delivering, operating and managing the affordable workspace. This can create a number of issues. A common concern for institutional real estate investors and lenders purchasing and/or developing a property is the often prescriptive and onerous nature of the affordable workspace provisions, which may constrain any future sale of the property and which may impact on its marketability. As a result, many investors/lenders are currently not prepared to accept a subsidised affordable workspace (certainly not one which is largely equal to the provision of traditional office space alongside) as this would undermine their business model.

The City may still be laid out along Medieval streets, but key to its sustained success is its undoubted ability to innovate and transform. Significant challenges remain, however, in addressing the concerns of investors, developers and occupiers as this transformation takes shape. If these can be overcome, the City will continue to be a city to be reckoned with through the ages and one which can continue to provide exciting returns for investors at home and abroad.