While the worst is over for the Midlands commercial property market, the recovery is expected to be slow although also steady. The problem lies in the future as the top grade offices get absorbed at a time when developers are still shying off building again. At the moment the market in Birmingham is dominated by deals at the smaller end of up to 465 sq.metres (5,000 sq.ft.). Nevertheless, a surge of lettings including a large one of 107,000 sq.ft. at Calthorpe House in the third quarter pushed the 2010 annual figure above expectations at 62,094 sq.metres (668,392 sq.ft.)) reports Jonathan Carmalt of King Sturge. “These figures show the breadth of occupiers in Birmingham with the outcome fitting into the long term average. With no new space being delivered this year the supply of Grade A will steadily diminish. In our view the current year will be challenging, particularly as the public sector is largely out of the market.”
In the broader context what is encouraging is that manufacturing is leading the UK economy out of the recession which is certain to impact on the Midlands industrial market, already noticeable with the decision to rescind the closure of a Jaguar car plant. The improvement in manufacturing is coming through the traditional industries of engineering and machinery which has always been at the heart of the Midlands economy. There is, however, some danger in the rebalancing from a consumer/public sector economy to more reliance on manufacturing. For example public sector employment is declining which Oxford Economics expects to limit employment in Birmingham this year, despite increased industrial output.
Another danger is increased inflation which has been persistently above target for some time. As the supply of properties declines, that could mean increased rents. At the moment the top rent reached for Grade A in Birmingham is £301.28 a sq.metre (£28 a sq.ft.) which Jonathan Fear of Jones Lang LaSalle said is the limit for this year. DTZ notes that prime space is thinly traded and there are only 3 or 4 buildings in the city with space available to meet this definition. It also puts rent free periods at as much as 24 months.
The dominance of occupiers seeking bargain priced leasing deals could be coming to an end, said CB Richard Ellis. The firm’s Will Ventham makes this point because the decline in the amount of Grade A space available and the empty development pipeline means an improved market for landlords. To those who take a cynical view of prospects for large lettings Ventham said: “For three consecutive years Birmingham has secured one or more transactions in excess of 9,290 sq.metres and there is no reason that this trend should not continue into 2011.” Jonathan Fear said there are a number of large requirements in the market from Rare Games and Pinsent Mason, the lawyers, for example. His projection is for a similar level of activity to 2010 and is looking to 2012 and 2013 to bring a more positive approach by occupiers. CB Richard Ellis suggests ”that some larger professional firms reaching breaks or lease expiries are now more likely to take advantage of market conditions and acquire new space to better suit their business needs and minimize costs.”
Spirits are lifting in Birmingham as the developers, together with the city council, change the 213,670 sq.m. Arena Central scheme. The new plans by Miller Developments and Bridgehouse Capital mean an increased amount of offices in the project, which was halted in 2008 when the UK economy stalled. The developers will also rephase the Section 106 payments and Section 278 highway construction to help the development of the site. Given the scope of the £17 billion plans to transform the centre of Birmingham, which includes a new library facing the offices in Arena Central, then the council could be making a crucial move. The financial hiatus has led to further consideration by the council of other schemes, such as changes to the redevelopment of New Street Railway Station which could mean dropping the two towers in favour of a massive John Lewis store. The council remains committed to the grand plan to change the UK’s second city on the 2,000 acres it controls in the centre with new space of 1,486,400 sq.metres (16 million sq.ft.), the most ambitious plan of any UK provincial city.
Investment and development opportunities are arising from
the problems encountered in fulfilling the grand plans of Birmingham City Council for regeneration.
Apart from anything else, the sheer scale of the schemes means that determined operators can find opportunities. That surely applies to Sanguine Hospitality which has moved to a third deal in the city in a short period with plans to buy the former Kennedy Tower office block at Snow Hill Plaza from Bruntwood. The deal depends on planning permission for a change of use to a 224 bedroom budget hotel.
The point about Sanguine is that it has backing from Downing Corporate Finance and Rathbones but it is also using the government’s Business Premises Renovation Allowance to ease the deal. This provides a tax break to bring derelict buildings back into use.
Sanguine’s Chairman said: “We are delighted to be involved with a third hotel scheme in Birmingham. This will be a much larger project but will again involve an international brand.” This positive view of Birmingham is backed by Henderson who has paid £26.2 million for a 12.5% shareholding in the Fort Retail Park. As a result Henderson’s UK Retail Warehouse Fund’s stake has increased to 50%. The shareholding was bought from Invista Real Estate Management. Another significant purchase is Hansteen Holdings paying £23.3 million for the 984,770 sq.metres (1.06 million sq.ft.) 22 Unit Saltley Business Park from LPA Receivers acting for Lloyds Banking Group. At the moment eight of the units on the park are empty.
Perhaps the most important guide to the future of investment in Birmingham comes from Dr Karl-Joseph Hermanns-Engel of Union Investment who believes that the main regional cities in the UK provide the opportunity to diversify the fund managers’ UK portfolio “without compromising on building
quality, tenant strengths and lease lengths.”
GBR Phoenix Beard and DTZ have started the New Year by announcing two new lettings at Elmdon Trading Estate and one at Gravelly Industrial Park. Titanium Metals has signed a 10 year lease at Elmdon and an audio visual conferencing
company Aventeq has signed up for 5 years to a 5,400 sq.ft. facility at the site. The letting at Gravelly Industrial Park was to Blue Seal. Christian Smith, Head of Industrial Agency at GBR Phoenix Beard,said: “These latest announcements are testament to the enduring appeal of Elmdon Trading Estate and Gravelly Industrial Park and the investment undertaken by
Standard Life in refurbishing vacant units. Feedback shows that occupiers feel these are well managed and secure
industrial sites, with well maintained communal areas.”
ProLogis has agreed an unusual deal with car manufacturer BMW in which it is responsible for the maintenance and repair of a 42,548 sq.m. shed at Pineham, Northamptonshire. BMW is paying £59.18 a sq.m. for the unit on a 10 year lease which will become its regional distribution centre delivering parts for Rolls Royce, Mini and BMW. Given planning permission it could be completed by 2012. The car firm will move from Bracknell, which is now too small for its expanded UK operations. Recent DTZ research said the UK offers good value for logistics occupiers until 2012, despite higher occupancy costs compared with continental Europe. Simon Lloyd of DTZ said: “In the Birmingham market, rents are close to the European average but UK locations have increased total occupancy costs because of high property taxation. Furthermore, fuel duty will increase costs for all UK operations. On the other hand, costs and flexibility remain highly competitive.”
A large letting to E-ON of the 9,755 sq.metres (105,000 sq.ft.) former Treasury buildng boosted Nottingham last year but the overall sentiment remains cautious for the current year.
Like other Midlands cities, the test will come with the improving economy and the absorption of existing Grade A space. Helen Longstaffe of DTZ commented: “At the start of last year there was a general concern that the city centre office market would grind to a halt and the number of transactions fall dramatically. These predictions proved to be somewhat downbeat and the Nottingham market has been resilient.” She added that the take up of almost 23,225 sq.metres (250,000 sq.ft.) is above the long term average and “largely attributable to the diverse nature of demand active within the city.” One future problem could be that while supply is restricted because of a lack of new building, Nottingham City Council plans to release around 18,580 sq.metres (200,000 sq.ft.) onto the market. In separate research, DTZ is also cautious about the investment outlook for provincial cities (though foreign investors have recently shown more enthusiasm for deals in the UK regions) and adds that “unless there are more numerous and aggressive requirements from institutions pricing could potentially ease again.”
On the other hand there are institutions prepared to act, as Allianz has shown by forward purchasing Speedo, the swimwear manufacturer’s new headquarters at Miller Birch’s ng2 development. Allianz Global Investors paid £10 million, a yield of 7% for the 3,995 sq.metres (43,000 sq.ft.) building. King Sturge and Innes England advised Miller Birch on the deal. There are also a number of requirements in the market, such as to KPMG and Deloitte as well as the public sector (the Ministry of Justice). These may be more problematic in view of government spending cuts.
One interesting development in Nottinghamshire is at Carriage Court, a quality group of buildings built by the Duke of Portland on his Welbeck Estate. This has now been turned into seven suites aimed at creative industries such as digital publishing and design. A central part of the development, which could provide a model for the rest of the UK, was to breathe life into the local village through new commercial activity. It is being marketed by Knight Frank.
Lincoln is the focus of a substantial expansion of hotel space with the latest being a DoubleTree by HILTON four star unit with 115 bedrooms on Lincoln Marina in 2011. This follows the opening of a Holiday Inn Express, which is being expanded by 50 rooms, and a planning Premier Inn. In addition, independent hotel groups such as White Hart, the Castleand Charlotte House (a guest house) are also expanding their offer. A Lincon bed and breakfast has been voted No.8 in the world. Emma Tatlow of Visit Lincolnshire commented: “Research shows that Lincolnshire attracts 17 million visitors a year, and the city of Lincoln with its history and heritage is one of the main attractions.”
The new hotels will almost double the number of bedrooms to 1,146. Also in Lincolnshire, letting space in the expanding network of business and innovation centres has boomed, according to figures from the city and county authority. Occupancy levels at new centres are exceeding forecasts. At the Terrace in Lincoln 88% of the units are occupied and at Greetwell Place, 94%. “Lincolnshire business centres are achieving, or surpassing, forecasts and expectations,” said Will Bedford of Lincolnshire County Council.
Apart from the demands of growth in the City, there is also the looming Olympic Games next year which will put pressure on the transport system. This applies particularly to Upper and Lower Thames Streets which will be kept clear for the movement of Olympic dignitaries. The objective of the City of London “is to keep central London ticking over.”
While the major institutions feature so much in the performance of the Square Mile, there is also a need to support small businesses with 85% with City businesses employing less than 50 people. The City is looking to support these businesses through promoting new initiatives such as the Government backed Innovation Warehouse scheme and through introducing guidance packs for SMEs setting up in the City.
The City of London’s promotion of a broader economic base with increased leisure and retailing has been justified in spectacular fashion in the past year with the opening of the New Change retail complex. This is at the core of the move to a ‘seven days a week’ shopping offer which is gradually widening away from Cheapside to include peripheral areas. New Change, with its 58 shops, (30 of which have never been in the City before), has proved very popular with the 300,000 visitors in December, which despite the poor weather was a figure higher than anticipated. To add to the attractions of hopping, the City of London is seeking powers to allow trading as part of street events, which could prove attractive with the City’s easier parking for cars at the weekend. In time it is hoped that all the retail areas will link, from West (Cheapside) to East (Spitalfields) drawing in the historic Leadenhall Market which is 600 years old this year. The City of London has invested £6 million in the area around New Change to improve the environment, including widening the payments.
All the pieces of the jigsaw are in place for the City to enhance its reputation as the top financial centre with plans for major new developments, the completion of the cluster of skyscrapers and the provision of a considerably broader range of retailing and leisure facilities.
The feedback from the Barbican Residents Association has underpinned Hammerson’s plans for the two building St Alphage House, London Wall which is being designed by MAKE. For Peter Bennett, City Surveyor, this is coming at the right time when there are sizeable requirements in the market which mean pre lets. St Alphage House is one of a number of schemes in a year which promises to be particularly active at a time when city employment is increasing again. Among other schemes in the pipeline are Helical Bar’s 26,012 metres (280,000 sq.ft.) Mitre Square and Exemplar’s 23,225 sq.metres (250,000 sq.ft.) at the London Fruit and Wool Exchange, Spitalfields.
The provision of improved education and leisure facilities is coming through with an international class Guildhall School of Music with a 600 seat concert hall as part of Heron’s residential scheme at the former Milton Court building. The past few months have seen a number of confidence boosting decisions for the Square Mile’s financial standing, such as:
- UBS is to move into a new 74,320 sq.metres (800,000 sq.ft.) complex at Broadgate;
- Bloomberg is to take 46,450 sq.metres (500,000 sq.ft.) in a development of the Bucklesbury Island site and another sizeable chunk will be built speculatively.
- Further funding to complete the Pinnacle skyscraper;
Other schemes at 6 Bevis Marks and 10 Moorgate. The City of London has been particularly supportive of these schemes. The encouraging factor is that there are other large requirements in the market from insurance, legal and banking organisations. Bennett said: “The sentiment is that there is money to be made in the markets and that businesses want to express themselves through new buildings.”
One encouraging factor for investors and developers is that demand for office space from financial groups in 2010 exceeded the period before the recession. Knight Frank believes that there will be continued demand from banks over the next three years. The firm’s William Beardmore-Gray said: “There are financial firms we talk to who want to acquire offices and expand in London and need to act ahead of approaching lease expiries in 2014 and 2015.” On the other hand there is some concern among banks that new government regulation may affect their business. But the picture is encouraging for developers and the deals are coming through, such as Axa Real Estate Investment Management (REIM) teaming up with Favermead for speculative development of 19,974 sq.metres (215,000 sq.ft.) at 60 Holborn Viaduct,
the site of the former Bath House. The new building, designed by Kohn Pedersen Fox Associates, will be completed
by 2013. As far as the rest of the Midtown market is concerned, Charles Killen of EA Shaw said: “There has been a bit of a buzz about the market since we came back after Christmas. Buildings that aroused little interest before then now have a
number of interested parties. It is a little volatile but we expect a steady year as the vacancy rate (now 5%) falls further.”
Further evidence of the return of a more confident market is that an agreement has been signed for the speculative development of the former Middlesex Hospital site in the West End. The scheme will include a mix of private and affordable apartments, two Grade A commercial buildings, retail and amenities for local occupiers including a health centre and an education facility. The intention is to submit a new planning application in mid 2011. Following the grant of planning permission, work will commence on site immediately. The agreement is for the Icelandic Bank Kauphing to put in the site at a value of around £150 million and Aviva Investors to provide finance while the scheme is developed by Exemplar. Clive Bush of Exemplar said “Two single lot sizes will be more appropriate for West End occupiers and more acceptable to the investment market. Hopefully we can take advantage of the shortage of stock.”
The impact of the sale of Irish owned properties is considerable and will continue for some time. A prime site on the corner of Whitcomb Street and Panton Street, Leicester Square, which was formerly owned by Irish Investors, has been sold to a joint venture of an overseas investor, Lemur, and a new development firm set up by former Balllymore director Tim Farrow for £6 million. The intention is to build a 245 bedroom hotel, 33 luxury flats and a 660 seater cinema. At the
nearby Swiss Centre site, Irish developer McAleer & Rushe is hoping to sell the W hotel scheme for £200 million. The decision to sell has come after a number of approaches by buyers for the project. In Pall Mall . Ballymore has sold a site
to Amazon Properties for £6.2 million, a yield of 4 %. At the moment 42-43 Pall Mall is let as offices but Amazon will seek
planning to convert the property to residential use.
A rosy picture of the market has been painted by DTZ in its predictions for 2011 in a resurgence of pre letting activity and investment. This will be driven by greater demand from occupiers so that DTZ reckons that monthly lettings
could reach 92,900 sq.metres (1 million sq.ft.) with rental increases to £645.60 a sq.metre (£60 a sq.ft.) in the City and £1022.20 a sq.m. (£95 per sq.ft.) in the West End. Colin Wilson of DTZ commented: “As we move into 2011, it seems increasingly likely that further stock will be brought to the market as banks and, in particular, Ireland plc accelerates the de-leveraging process.” Colliers’ view is that the West End retail and hotel businesses are in good shape with rents rising and a weak pound helping to pull in foreign visitors. Even the volume of retail
sales rose in 2010 from the level of the previous year. Colliers’ Mark Charlton said: “Currently an astonishing £1 billion of investment in the West End is
planned over the next two years, with a number of major developments well underway.”
If there is one figure that illustrates the fact that the world
is awash with money then it has to be Jones Lang LaSalle’s
estimate that there are 1,000 cash buyers for London property. As a result, JLL’s Damian Corbett believes that the London market will be flooded with international money in 2011 coming from 35 different countries.
These investors arenow prepared to spend £200 million each, a four fold rise in a short period. There has been a shift in the balance of cash flows with this year expected to see more dominance by Far East and German investors. In the case of the Middle East investors, the expectation is for a concentration on putting money into new developments as we have seen in the past few years, notably at the Shard of Glass.
One source of supply of properties will be Ireland’s National Asset Management Agency raising money to pay back bank debt. The British institutions should not be left out of the equation. For example the cash rich Legal & General is prepared to pay £300 million for Delancey and Invista Real Estate’s 110 Fetter Lane for a yield of 4.6%, the lowest in the City for four years. The 24,619 sq.metres (265,000 sq.ft.) property is fully let with the HM Courts Service occupying just over half of theoffices. There is a solid basis for the buying spree because figures from the IPD put the return on property in 2010 at 14.5%, the best for four years.
One of the more unusual deals is that Arab Investments is expected to sell GVA’s 3,855 sq.metres (41,500 sq.ft.) headquarters in Stratton Street, W1 to the Algerian Embassy for £60 million, a yield of under 4.47%. GVA’s lease has another four years to run and the property is expected to be redeveloped. But will it become an embassy for the Algerians? It comes at a time of growing confidence in the West End. Richard Scott of Mellersh & Harding said: “The market is more positive and the shortage of prime offices means we will see increases in rents. The bellwether for the current market is provided by 40 Bruton Street where rents have moved up to more than £1,022 a sq.metre (£95 a sq.ft.) rumoured to be well above that for the top floor.”
Any doubts about the long term future of the Kings Cross
development have been eased with the decision of French bank BNP Paribas to buy a site for its first office development in the UK. The property arm of the bank has plans for a massive 79,968 sq.metres (860,800 sq.ft.) scheme. The bank intends to occupy some of the space and will start construction in 2012. Phillippe Zivkovic of BNP Paribas said: ”Work will begin in the autumn after the Olympic Games and be completed by 2015. The development means that all our six business lines will be established in the UK.”
The widening appeal of Greater London to developers and investors is shown by the variety of schemes outside the centre, notably in East London and the Southbank. At Waterloo investors, together with their architects, have lined up to buy three of the four buildings of the Shell Centre with bids of at least £150 million. The intention is to redevelop the buildings (the central tower remains) and lease them back to Shell in a scheme totalling 111,480 sq.metres (1.2 million sq.ft.).
Alastair Hilton of Farebrother said: “The Shell Centre is a long overdue opportunity for development to make a statement in the area. It is likely to be bought by an institutional player, either UK or backed by an overseas fund.” In Docklands, Asda plans to transform its supermarket site at Crossharbour in a £400 million scheme for 1,000 residential units, a supermarket and other shops and leisure. It has a relationship with Ashbourne Beech dating back to 2005 to develop the 12 acre site. Richard Frank of Town & Beach, parent company of Ashbourne Beech, believes a downturn is a good time to seek planning permission. He said: “We do not want to be in a lengthy planning process when the market returns, as experience tells us that once you are ready
to go, you may have already missed the boat.”
Few analysts could have predicted the rapid turnaround in the central London office market when the recession kicked in
during early 2008. The forecasts were terrible; the collapse of the market, the decline in employment and the loss of the City’s status as the leading world financial centre. They were wrong and now the problem, particularly in the Square Mile, is the shortage of supply as financial institutions expand and increase their employment.
The problem is that there is a shortage and those with the prime space, such as Gerald Heron in Bishopsgate and Irvine Sellar at the Shard, London Bridge have reaped the benefit. Some property professionals are concerned about the period of shortage of supply whic could last two years, suggests Tony Joyce of GVA. Here, one of the problems noted by Joyce “are landlords whose funding package pushes them towards seeking 15 year leases at a time when occupiers mostly want 10 years”.
For City agents like Joyce the recovery in rents has been rapid with a majority of deals done for prime new space being above £538 a sq.metre (£50 a sq.ft.). In fact, the City saw the largest annual increase in rents for 22 years in 2010 with increases of 25% for prime space, said Drivers Jonas Deloitte. That was on the back of a letting total of near 557,400 sq.metres (6 million sq.ft.). Drivers Jonas Deloitte’s Anthony Duggan commented: “Although we are not expecting rents to continue at the pace seen last year, we do expect double digit growth again in the City.”
The firm makes the point that only two large buildings are completing this year. Naturally enough rent free periods have come back substantially, in both the City and West End. Investors, dominated by foreign nationals and organisations, have responded to the strong performance with purchases in central London in 2010 totalling £9.9 billion, a rise of a third on the previous year. Overseas buyers accounted for two thirds of the total. Cushman & Wakefield’s Clive Bull said: “With sterling still weak and an increase in stock likely with banks offloading assets, we are confident that 2011 will see volumes continue to rise.”
While the worst is over for the Midlands commercial property market, the recovery is expected to be slow although also steady. The problem lies in the future as the top grade offices get absorbed at a time when developers are still shying off building again. At the moment the market in Birmingham is dominated by deals at the smaller end of up to 465 sq.metres (5,000 sq.ft.). Nevertheless, a surge of lettings including a large one of 107,000 sq.ft. at Calthorpe House in the third quarter pushed the 2010 annual figure above expectations at 62,094 sq.metres (668,392 sq.ft.)) reports Jonathan Carmalt of King Sturge. “These figures show the breadth of occupiers in Birmingham with the outcome fitting into the long term average. With no new space being delivered this year the supply of Grade A will steadily diminish. In our view the current year will be challenging, particularly as the public sector is largely out of the market.”
