Q+A: Ashby Capital's Ferrari on why values will stabilise this year

By Ashby Capital

Chief Executive gives his views on the London office market and when to expect a recovery.

Undeterred by the headwinds facing the London office market, Ashby Capital is sticking to its plan of delivering new office developments in the most promising areas of the capital in the anticipation of a recovery in values towards the end of this year.

Its latest developments in Kensington and Smithfield are already letting up, underpinned by the developer’s conviction that occupiers are increasingly favouring quality space over the postcode, while offering something outside the 9-5.

React News sat down with Ashby’s chief executive, Peter Ferrari, to discuss everything from the 15-minute city to an impending recovery and Slough.

You delivered two new buildings to the London market in 2022: The Kensington Building alongside Janson Urban, and The JJ Mack Building alongside Helical. Given the current economic sentiment, how confident are you in the London occupier market?

We’re feeling relatively optimistic. Although the outlook isn’t so good for secondary stock, demand for high-quality buildings in popular locations remains extremely resilient, as our lettings – at record levels for the area – to Partners Group at The JJ Mack Building in November and the recently announced EssilorLuxottica deal at The Kensington Building show.

An economic downturn might dampen the activities of some; however, businesses looking to upgrade their space and invest in workplaces that meet their ESG criteria, attract staff, and better suit modern working practices will continue to drive rental growth.

This demand will be concentrated in workspaces with the best amenities, sustainability credentials and tech features, reflected in the high levels of interest and viewings we’re currently experiencing across our portfolio.

From a landlord perspective, how big a problem is the secondary office market for London – and what does it mean for landlords holding a lot of grade B stock on their books with regard to incoming EPC standards, availability of finance for this type of stock and prospects of retaining tenants?

There’s no doubt that the quantity of grade B stock on the market is an issue; however, there is the demand there for buildings with good bones in good locations to be refurbished and repurposed. This will fuel a huge amount of redevelopment over the coming years, and represents a huge opportunity for the industry to show its flair and expertise and put the significant volumes of capital currently in reserve to work.

The Kensington Building is the first new office building in the area for more than 35 years. What attracted you to the site and location?

With modern occupiers increasingly attracted to quality of space rather than being restricted by postcode, and with staff keen to find a place of work that offers something outside the 9-5, we always felt that Kensington has a lot to offer. Data suggests that the pandemic has only deepened this trend.

Recent analysis by CBRE Investment Management found that offices with shops and restaurants nearby are enjoying pre-pandemic levels of commuters travelling, while offices in areas without are struggling.

With modern occupiers increasingly attracted to quality of space rather than being restricted by postcode, and with staff keen to find a place of work that offers something outside the 9-5, we always felt that Kensington has a lot to offer. Data suggests that the pandemic has only deepened this trend.

Recent analysis by CBRE Investment Management found that offices with shops and restaurants nearby are enjoying pre-pandemic levels of commuters travelling, while offices in areas without are struggling.

The Kensington Building has been described as one of London’s most sustainable new office buildings – what sets it apart from other new developments in the capital?

Offering light, space, high ceilings and great views, The Kensington Building is an inspiring place to work and has prioritised sustainability throughout, from its construction methods and materials to energy efficiency and wildlife-friendly greenery.

By reusing the existing building’s concrete frame, we were able to transform a tired, outdated building into a brand-new office and retail destination, saving significant energy and emissions compared with building from scratch and proving that the highest quality buildings can be created through refurbishment.

Bringing together interior design and first-class facilities, we have prioritised the everyday wellbeing of occupiers through light-filled offices, plentiful cycle parking, luxurious shower rooms, vast roof terraces and more.

You’ve traditionally invested in locations set to benefit from new transport infrastructure. Are there other parts of London you’ve identified as being particularly attractive from a future investment perspective?

With the first spade in the ground back in 2009, the Crossrail effect on values near stations across central London has long been played out. However, it still has an important role to play in less obvious locations that benefit from it, such as Kensington where the proximity to Paddington greatly improves its connectivity across London.

As one of the world’s few truly global cities, London is shielded to some extent from a poorly performing domestic economy, however it is sensitive to global events.

Meanwhile, locations outside London such as Slough will benefit from the full Elizabeth Line timetable commencing this spring, allowing people to experience quite how accessible these more affordable locations now are.

Peel Hunt has said UK commercial real estate values are likely to reach their lowest point in Q1 2023 and then start to rise again. Do you agree, or do you feel that values will continue to fall in London beyond this point?

With interest rates expected to level out at 3.5% to 4% and inflation gradually receding, alongside the prospect of healthy rental growth for grade A stock, I also expect to see values stabilise in 2023, with the prospect of some recovery by the end of the year.

With investors unable to rely on capital growth to satisfy their returns criteria in the current climate, are you seeing greater interest from investors looking to partner with you on development projects, in the hope of generating bigger returns?

In the current climate of scarce and expensive development finance, we are likely to partner with experienced developers of prime product and anticipate a busy year ahead.

What is the single biggest threat to the London office market?

As one of the world’s few truly global cities, London is shielded to some extent from a poorly performing domestic economy, however this does mean the capital is sensitive to global events. Therefore, a continuation or worsening of the conflict in Ukraine, escalation in other regions such as Taiwan, or another hypothetical global crisis, would inevitably have a negative impact.