Investors in the City of London's tallest office tower will be asked this month if they want to go ahead with construction. A lot of developers in the financial district will be hoping they don't.
The 22 Bishopsgate project, overseen by AXA's real estate unit, would add 1.4 million square feet of offices and shops. As the City feels the pinch of the Brexit vote, about 6.4 million square feet of office space are set to be completed in the district in the two years through 2019, broker Savills PLC said in a report last month.
"Some large projects being delayed isn't necessarily a bad thing for the market," said Tony McCurley, a partner at GM Real Estate, which focuses on the City. "We had been quite concerned about the risk of oversupply in 2019."
Developers are facing higher construction costs because of the devaluation of the pound, reduced access to finance for speculative construction and short-term doubts about tenant demand, Mr. McCurley said. About 4 million square feet of the space planned for City is now "uncertain," according to GM.
Construction work started on 26 City of London office projects in the six months through March, according to a May report by Deloitte LLP. If work on the AXA development starts this year, it will account for about half the amount of new office space due to be completed in the Square Mile in 2019, based on Savills data.
AXA Investment Managers-Real Assets, which is leading the project to build the 278-metre Bishopsgate tower, will offer investors three alternatives, a person with knowledge of the project said this week. They can either stick to a plan to start work on the building this year, delay the project or sell it, the person said. The last option is least likely.
The investors include Singapore's Temasek Holdings Pvt. Ltd. , Canada's Public Sector Pension Investment Board and British Columbia Investment Management Corp. Officials at the three companies declined to comment. A spokesman for AXA Investment Managers-Real Assets said the company is committed to the site, is continuing to work and is considering its options.
The pound's 11-per-cent decline against the dollar since the June 23 referendum has increased the cost of importing materials – which typically make up about a third of a project's cost – by as much as 8 per cent, according to Mark Cleverly, head of commercial development at building consultant Arcadis NV. That's on top of annual construction-cost inflation, which has been running at about 8 per cent, he said.
"What we normally see around a year after a black-swan event, like the collapse of Lehman Brothers, is a deflationary effect of about 7 per cent," he said. "So a lot of developers are now looking at their procurement strategies and analyzing what they can buy later."
No major construction projects have started in the City since the Brexit vote. Partners Group Holding AG has yet to start full construction on a 245,000 square-foot office building at 80 Fenchurch St. Building work was due to start in "early 2016," according to its website. A spokeswoman for the company declined to comment.
TH Real Estate is building 300,000 square feet of office space at 60-70 St. Mary Axe in the City. That's scheduled to be finished in December, 2018.
"The City of London market has recently suffered from under supply," said Geoff Harris, head of development at the company."So if some of the pipeline projects get delayed, then the mood is pretty good for those that do continue."
The tower at Bishopsgate is the tallest building in the City of London to have been approved by planners. The main construction contract could be signed as soon as October, if investors choose to proceed, the person familiar with matter said.