Leading property experts predict West End rent spike in 12 months

Leading property experts predict West End rent spike in 12 months

NAI Haywards, the property experts specialising in supporting business occupiers, has issued a warning that the West End office rents could spike in 12 month’s time.  This may create a “perfect storm” for many media companies who are already facing a squeeze on margins.

West End office vacancy rates are under 6.0% with some submarkets being as low as 3%.  The result – office rents have risen sharply and incentive packages have fallen.

Looking out over the next 12 months, there is little on the property horizon that will change.  Office supply will not increase dramatically over this period.  Occupier demand, measured in terms of take up of space whilst low, is sufficient to keep pushing rents upwards, particularly for flexible, air-conditioned office space.

How will this predicted rent spike affect media businesses?  For those, who leased offices in 2009 (i.e. the lowest point of the rent curve in recent years), many will be facing a lease event (an expiry, break option or rent review) in 2014.  This group could see rent increases of up to 80%.  For those that signed leases a year earlier in 2008 should still expect increases, but they will be lower.

If you then add the other property cost increases such as rates, increasing service charge costs, higher energy costs; and the Crossrail levy, many companies could well see their margins badly affected.  The table below sets out the typical forecasted cost increases:-

2008 2011 2013 Typical Increase Total occupancy cost £ psf pa £48.00 £60.00 £70.00 £22 psf pa 20 head company (say 2,000 sq ft) £96,000 £120,000 £140,000 £44,000 pa 50 head company (say 5,000 sq ft) £240,000 £300,000 £350,000 £110,000 pa

The revenue implications to cover these increased costs are significant and may well be beyond many smaller businesses.

To support clients Kingston Smith W1 and NAI Haywards have teamed to develop a unique combined service to help media businesses overcome the current and anticipated market challenges.

WANT A FREE INITIAL CHAT? Contact your usual KSW1 Partner or James Kesner on 020 7304 4646.

Globalisation and Media

The world economy grew threefold, to reach $62 trillion, in the past 20 years(i). It will triple again by 2050(ii), indeed it will have doubled to over $130 trillion by 2030(iii). China at $24.6 trillion and the US at $22.3 trillion will dominate the global economy, with India at $8.2 trillion far behind in third slot.’

                                                                                                HSBC in January 2011(iv)

‘Convergent incomes and divergent growth – that is the economic story of our times. In short, today’s divergent rates of growth between successful emerging economies and the high-income economies reflects the speed of the convergence of incomes between them’(v)

                                                                                                Martin Wolf, writing in the Financial Times, 2011.

The Emerging Seven economies overtake the Global Seven economies

The rapid convergence between the E7 (emerging seven economies of China, India, Brazil, Mexico, Indonesia, Russia and Turkey) and the G7 (global seven economies of Unites States, United Kingdom, France, Germany, Japan, Canada and Italy) has been accelerated by the global financial crisis. In 2007, total G7 gross domestic product  was still around 60 percent larger than total E7 GDP (vi), yet by the end of 2010 the gap had shrunk to around only 35 percent. The catch-up process is set to continue over the next decade: by 2020 total E7 GDP could already be higher than total G7 GDP.  By 2030 E7 GDP could be 44 percent higher than that of the G7 and by 2050 could be double its size.

A new Middle Class emerges

Technology has helped lower the boundaries and reduce isolationism, helping to democratise knowledge – a necessary precursor for convergence. As such, the comparative advantage of many western world countries has been reduced, whilst the emerging economies, with their generally higher populations, seek to benefit from the inflow of ideas and capital. McKinsey notes that ‘…more than 70 million people are crossing the threshold to the middle class each year, virtually all in emerging economies. By the end of the decade, roughly 40 percent of the world’s population will have achieved middle-class status by global standards, up from less than 20 percent today (vii)’.

Economic power moves East

Economic power is moving east, yet many of the world’s major companies have remained headquartered in western nations. In a January 2011 report, The Boston Consulting Group identifies 100 emerging global challengers, about half of which could qualify for inclusion in the Fortune Global 500 within the next five years (viii). Overall, the global challengers generated revenues of $1.3 trillion in 2009. If these new challengers ‘…continue on their current growth path, they could collectively generate $8 trillion in revenues by 2020—an amount roughly equivalent to what the S&P 500 companies generate today.’ Intense competition seems likely, yet the potential for partnering and trade is also great.

Unsurprisingly, China is the greatest contributor to the list of 100 global challengers, with 33 organisations whilst India adds another 20. Whilst their contribution may be great, focusing solely on the Asian giants neglects other emerging world beating companies. Mexico with 8, has more than BRIC member Russia (6), whilst South Africa, Thailand, Indonesia, the UAE, Chile and Turkey have a combined total equivalent to India, despite having around a third of the population. The greater story is that globalisation is undergoing a change in its nature and its speed, and opportunities are opening beyond the not inconsiderable headlines.

Only in 2006 did the Chinese Central Government first incorporate the development of the digital content industry in its strategic five-year plan during the national People’s Congress conference. The digital content industry is now recognised as consisting of the six main subsectors which are: digital games, animation, digital TV and film, digital music, digital publishing, and e-learning.  All relevant administrative departments including the Ministry of Industry and Information technology have issued support policies.

Animation is one of the key sectors in Beijing’s cultural and creative industry development plan. Beijing’s animation sector has surpassed RMB 1 billion. They have the capital, with 37 firms in the Fortune 500 global companies and they are happy to spend on marketing services. China’s ad spend grew from $7 billion a year in 2000, to $38 billion 11 years later, making China the second largest advertising spender in the world.

Hot spots and opportunities

Any emerging and fast growth economy will be an opportunity for the confident and energetic agency. Traditionally these have been the BRIC countries of Brazil, Russia, India and China. These countries have a huge part of the world’s economy and natural resources. Together they account for about 25 percent of the world’s land mass and 40 percent of the global population. These may be the monolithic, vast and fast growth economies that are set to turn global trade on its head but other smaller economies offer great opportunities too such as: Vietnam, Indonesia, Taiwan, Singapore and even countries such as Paraguay, whose economies all grew rapidly in 2011.

While they aren’t on the scale of the BRIC nations, the ‘Next 11′ countries all have large populations. Indonesia is the largest at about 229 million, while South Korea is the smallest with around 48 million, and their populations are growing — not shrinking as is the case in many developed nations. Other things being equal, more people usually means more business opportunities

When you combine a good-sized, growing population with a modern industrial base you get a critical mass – the ability to produce consumer goods, and the consumers who can afford to buy them. Having natural resources, such as oil, in your back yard helps too.

All of this creates the potential for major consumer and business growth. And the opportunities for you to ride their growth and demand for marketing services.

Here is a complete list of the Next 11, from West to East (According to Goldman Sachs)

• Mexico
• Nigeria
• Egypt
• Turkey
• Iran
• Pakistan
• Bangladesh
• Indonesia
• Vietnam
• South Korea
• Philippines

Top cities of the world

The location for this latest round of globalisation, although potentially benefitting London, Paris and other global centres, will take place primarily in Asian cities. More than 20 of the world’s top 50 cities ranked by GDP will be located in Asia by the year 2025, up from 8 in 2007. During that same time period, our research suggests, more than half of Europe’s top 50 cities will drop off the list, as will three in North America. In this new landscape of urban economic power, Shanghai and Beijing will outrank Los Angeles and London, while Mumbai and Doha will surpass Munich and Denver(ix). 

How did it work out for others

Ogilvy and Mather

Ogilvy arrived in mainland China in 1991, having previously established offices in Hong Kong in 1972 and in Taipei in 1985. The agency is now the largest in Greater China employing over 2,400 across 29 offices in 18 markets, spanning from first to third tier cities. They opened their first office in Shanghai because their client Unilever wanted to move their Asia HQ to Shanghai so they signed a joint venture contract with Shanghai Advertising Group. They hired local people at executive level or entry level and had no middle managers in the beginning.(x)

The Ogilvy approach is one many can mimic even today, twenty years later. Enter the market with a client, engage the market in partnership and hire local talent.

Red Ant

British Interactive Strategies Company Red Ant set up its new branch in Jiashan Square in Shanghai in 2011. The company also has offices in London, Dublin, Sao Paulo and Rio. CEO of Red Ant Jacopo Stecchini was born in Italy, has many years of living and working in New York and Los Angeles. Red Ant was founded in 1999 and provides social media, mobile communication, video media, website design and construction and other interactive media professional services.(xi)

China has more than 480 million Internet users, more than 800 million people will become Internet users soon. The company is very optimistic about China’s huge potential and prospects in this market.

Red Ant CEO went to China five years ago to establish connection with the market and their future customers. Long term investment in research and relationships will pay off in establishing a foothold there.

What to do

Hopefully you will have been convinced, if you weren’t before, that globalisation is a real opportunity for organisations that are seeking to grow. There are rapidly expanding corporations in high growth economies that are set to rival established global players that will need help in promoting their goods and services to fast growing and increasingly affluent ‘middle class’ consumers. Each fast growth economy is unique and there is no one-size-fits-all approach, indeed in large countries, such as Brazil, the populations and cultures of the various regions of the country are sufficiently different to require individual approaches. Having said that, there is one strong cultural quality in Brazil – they love to share information with one another, it is a social media paradise. Equally, Russians in the west are different to those that live eight time zones away in the east of that vast country.

There are principally three ways to use this knowledge to expand:  

1. To take your capabilities to new territories, often through existing clients or local partnerships.

2. To identify new players in fast growth economies wanting to enter the UK and European markets.

3. Use offshore capabilities to augment your own offering and capacity.

All three approaches are tried and tested and have borne fruit for those that have engaged using these strategies. The key is to do something rather than expect that you will benefit from the fast increase in economic activity taking place beyond these shores by osmosis, that’s not going to happen. In fact the reverse is more likely, that foreign players will compete with you for the highly lucrative UK market.

The early movers into these vast economies set up in western facing cities over twenty years ago. They’ve built long-term and successful relationships with local clients and have represented their western clients interests for many years. If you’re thinking of pursuing opportunities for your firm in these locations there are plenty of western oriented partners to co-operate with. If you believe that you have a unique offering then focusing on this will be the way into these markets.  One look at the ‘Agency Directory’ for China shows that there are 5,094 agencies offering everything from specialist niche services to full service capabilities. It’s not that the ‘gold rush’ is over in China or any of the other fast growth economies, but that the competitive landscape is changing – becoming more sophisticated.

Alternatively, you might want to focus on the brands entering the UK from these economies, the latest highly visible entry being  Geely with its low cost Emgrand branded EC7 car from China. For the UK market, Geely teamed up with Manganese Bronze, the taxi manufacturer, illustrating nicely that partnerships are the preferred way into new markets. This year Ogilvy became the first ad agency to launch a China Practice in New York to serve the growing need for communications services by China-based companies as they move into international markets. Chinese companies have yet to learn the full value of market research to identify opportunities or learnt how to operate effectively abroad.

Summary

As in all new opportunities the winners will be those that are prepared to adapt, to take on new markets and be prepared to partner and share their endeavours with others. Others, in this case, that can provide access and oversight in far flung markets.

Winners, such as the big media brands operating in China, gained their foothold through painstaking homework and developed their opportunity over a long period of time. With these economies set to be the long term growth engine for the global economy and of middle class consumers  this then is the new home of the expanding marketing services firm.

Check list

1. Be clear about your strengths and weaknesses.
2. Research the opportunities, at length.
3. Partner with clients and local players.
4. Hire local talent.
5. Be prepared to go into tier two and tier three cities, they’re still large.
6. Be prepared to go into the smaller booming countries, they’re still high growth.

Good luck

David Smith

Chief executive

Global Futures and Foresight

 

References

Outlook 2012 Survey

Earlier this year we conducted a survey into the views of managing directors and finance directors of marketing services, media and consulting businesses on the future financial prospects of their industries. This followed an equivalent survey the previous year. Following the generally upbeat

tone of the responses in the last survey the climate within the media and marketing services industries has continued to be tough. Planning for the future, whilst perhaps a little easier than the last couple of years is still very difficult and everyone is therefore naturally interested in the views of the industry as to what the future holds. It was encouraging therefore that the overall flavour of this year’s survey results was also a positive one. The majority of respondents thought that both income and profit levels would be higher in 2012 than in 2011 and nearly half of respondents were also looking to recruit. Whilst M&A activity started to pick up in 2011 and there was a general feeling

that it might continue to do so throughout 2012, the majority of respondents said they would not be embarking on any M&A activity in 2012. Our survey comprised answers from agencies representing the major marketing services disciplines as well as a number of market research agencies, consultancies and TV production companies of a variety of sizes. Of those responding the majority, 90%, were independent agencies or part of an independent group. Whilst the geographical footprint of the sample was mostly UK at 79%, there was a healthy 10% coming from other European countries and 5% from the US.

Read the full report here

Join the debate and leave your comments below.

The Mashed-up business

“It’s really hard to design products by focus groups. A lot of times, people don’t know what they want until you show it to them.” Steve Jobs, Co-Founder and Chief Executive, Apple

The Mashed-up business is created by joining together products and services from different firms to create a new offering that is only possible by the unique combination of resources and capabilities that you have assembled. We’ve been outsourcing many of our functions to achieve lower costs and better services levels for many years, we’ve even started outsourcing our innovation, even crowdsourcing, to speed up development of new products and services. Now it’s time to take the next step – to assemble components of other people’s offerings and business models to build something brand new to offer your clients – fast.

Transformation
Right now, the digital media industry is being transformed through convergence, more to the point, the news, information, entertainment and advertising industries are being transformed through digital convergence. Online- newspapers look more like TV channels (eg: The Times) and TV news programmes are looking more like newspapers (eg: BBC News). In just five years YouTube has become the most watched media channel in the world and newspapers could have largely disappeared, as physical copies, in the UK by 2019′. In the future we will increasingly want to pay for content, not paper and ink and transportation.

Facebook founder, Mark Zuckerberg, announced at the November 2010 Web 2.0 conference in San Francisco, that within the next five years he expects his company to make “billions and billions of dollars turning the TV, news, film and music industry upside down”.  If all that wasn’t enough reason to think that media world is in downward spiral of deconstruction, the Google backed O3B satellite network aims to provide mobile phone and internet access later this year to the other 3 billion people, the ones in the world who have no access today.

LinkedIn, with 100 million users executes its IPO this year with Groupon, Facebook and Twitter all positioning themselves to go public in the not too distant future. Facebook, with 600 million members is likely to see its 1 billionth member by the end of 2011. This sort of growth and change, alongside O3B means that by the end of 2011 we will be looking at a completely reconfigured digital media infrastructure. The players will have rearranged their ownership and 3 billion more customers will be online, mostly through mobile devices.

Curation
What was about control of content in the past, is today all about access. By the time all this is in place broadcast and broadband will completely overlap, and mobile broadband at that – access for all – but who will help navigate all this content?

The editorial role in TV and Newspapers isn’t going away any time soon, it’s just changing hands, from the traditional channel providers, such as The Times and the BBC, to social networks such as Facebook and Twitter. Even that’s not accurate, because it’s in the hands of the people on Facebook, YouTube, Google and Twitter. It’s their members who have become the new curators of content, and we’re following them. In the meantime, advertising is moving onto these online platforms but not fast enough.

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