Yorkshire grit payout

Perhaps it is a reflection of the region’s determined spirit, but the commercial property market is apparently ignoring the dire economic warnings and having something of a revival.

That has opened the way for higher office rents and a return of new development in central Leeds. Jeff Pearey of Jones Lang LaSalle takes an optimistic view of the situation.

“We have seen a significant improvement in occupier activity in the second quarter (which has continued since) with a 331% increase in lettings compared with the first three months and shows
that stronger sentiment is finally returning to the market,” he said. According to the Leeds Agents’ Forum there are promising signs that take up this year could top 37,160 sq.metres, well ahead of 2010. The Forum said: “While occupiers remain cautious, the figures show a healthy level of interest, at what is traditionally the quietest three months of the year.”

Some of these requirements are of impressive size. The law firm Squire Sanders & Dempsey is seeking 5,574 sq.metres. This illustrates Leeds’ role as a legal and financial centre. The natural reaction in a city where the amount of Grade A space is declining is new development.

And so to the action. Planning permission was granted in October 2011 for the redevelopment of a 120,000 sq.ft. landmark building above Leeds City Station. City House will provide Grade A, BREEAM Excellent offices suites of all sizes, meeting/conference facilities and serviced offices. The main contractor is due to be selected and various approvals with Network Rail are progressing to enable a start on site early next year with completion scheduled for mid 2013.

Gregory Projects and Marshall have also submitted a planning application for a £30 million office and hotel scheme at Whitehall Plaza, next to the railway station. It will have a 130 bedroom hotel and 4,645 sq.m. of offices. Richard Dunn of letting agent Sanderson Weatherall commented: “There is a shortage of Grade A offices in prime city centre locations and even ahead of the planning application, occupier interest in the scheme has been encouraging.” Adam Cockcroft of joint agent DTZ added that “Leeds remains one of Europe’s top business destinations and still enjoys a healthy demand for high quality offices, despite the economic downturn.”

Taking a shine to Leeds

The improved climate for development is likely to lead to the Lumiere scheme on Wellington Street, which was originally slated to be a residential tower, being developed commercially.

Ripley Capital and Axa Real Estate Managers have teamed up to acquire the site from Lloyds Banking Group. The property was designated to be Europe’s tallest residential tower but is now in the hands of the Receiver, Deloitte.

The new plans calls for a 1,1148 sq.metres scheme of offices and shops on the ground floor. Meanwhile, Legal & General, advised by Jones Lang LaSalle, has paid Danmerc £14.38 million for the 4,755 sq.metres office property at 1 Whitehall Quay, an initial yield of 7.88%. The largest investment deal, however, was RREEF buying the 9,011 sq.metres Lateral office building on City Walk, Leeds for £24 million from DTZ acting as the LPA Receiver.

The property is let to the Department of Communities & Local Government. In another major deal, a prime Leeds shopping arcade that boasts some of the UK’s top retailers has been put on the market by the Bank of Ireland Private Banking. The 20,903 sq.metres Grade II listed Victoria Quarter has been given a price tag of £135 million for a yield of 5%, reflecting the quality of the high end occupiers such as Harvey Nichols, Wolford and L’Occitane. The bank paid £126 million for the arcade in 2006 and there have been off market efforts to sell it for some time.

A Warning of Shortages

While the industrial property market in the region has displayed admirable stability, the lack of new development means that shortages are already occurring.

That is the message from Mike Baugh of DTZ who said: ”As the market improves and take up of vacant stock continues, we move closer to the situation where there is a shortage of some sizes of units. This is intensified by a shortage of land and a limited number of developers holding back speculative development.”

He suggested that the problem in Leeds was for companies seeking units of below 1,394 sq.metres (15,000 sq.ft.) bringing a ”hardening of rents and a reduction in incentives.” Even so, Yorkshire offers a higher proportion of Grade A industrial space than most of the UK.

Baugh said: “The window of opportunity for occupiers to secure an attractive deal is closing and they will have to be more organised and forward thinking in their search for new premises.”

Nationally, reports Jones Lang LaSalle, occupier demand in the first half for big sheds weakened and this continued in the three months to 30 September. But “investor demand is strong, concentrating on prime stock let to strong covenants on long leases.”

Two examples of recent industrial deals come from Knight Frank. It acted for Havells Sylvania who sold a 12,727 sq.metres (137,000 sq.ft.) warehouse in Shipley to Card Factory. At Harley Business Park, Bradford it has let 1,858 sq.metres (20,000 sq.ft.) to Barrett Steel.

Another significant industrial transaction in Yorkshire is provided by the bus manufacturer Optare which is amalgamating its three factories in Leeds, Blackburn and Rotherham into one 13,006 sq.metres (140,000 sq.ft.) unit at Sherburn Distribution Park, Sherburn in Elmet. This will be the first new bus assembly plant in the UK for 40 years.

Paul Mack of DTZ said: “The latest addition demonstrates the capabilities of the area as a hot spot for manufacturing and distribution in the Yorkshire region. The Sherburn Industrial Estate benefits from a huge power supply which is the key to the manufacturing sector.”

Backed by investment

Underpinning the positive view of the office market in the region is the steady flow of investment transactions.

In the largest deal for years, a fund managed by the investment manager Orion Capital Managers has bought a 50% stake in 43,663 sq.metres (470,000 sq.ft.) White Rose Office Park for around £130 million from Munroe K.

The transaction comes at a time when Munroe K is planning to expand the 27 acre park, which is three miles from Leeds city centre, with a 2,787 sq.metres (30,000 sq.ft.) office building and extended conference facilities.

David Aspin of Munroe K said: “The acquisition by Orion underscores my belief in the future of the park and gives us one of the truly forward thinking fund managers to partner, further manage and develop the business park.” There is one small office suite to let at the park, which has a number of blue chip tenants such as HSBC, O2 and the WSP Group.

Static rents

Static headline office rents in Leeds could affect the timing of new development. At the moment they are set to stay at £258.24 a sq.metre (£24 a sq.ft.) for the rest of 2011, said Knight Frank. This is below the peak of 2009 because of a decline in demand illustrated by the 45% drop in take up last year, said KF’s Alex Munro. Even so, an interesting pointer to the future in Leeds will be when BAM decides to go ahead with its 10,684 sq.metres (115,000 sq.ft.) building adjacent to IVG’s No1 Leeds, which is slightly larger.

King Sturge has joined Knight Frank in letting this property. The firm’s Richard Thornton said: “The building offers large floor plates as well as part floors and is ideally placed to capitalise on various occupier break clauses and lease expiries we have identified this year.” Also being launched is the mixed use property, Indigo Blue, located at the junction of Crown Point Road and Hunslet Lane. It has residential units and 945 sq.metres (10,173 sq.ft.) of offices. It has been developed by Merlin Properties and is being marketed by WSB Property and Sanderson Weatherall.

Classic Bruntwood

With its long history of refurbishing large offices, Bruntwood now proposes to revitalise the 11,148 sq.metres City House, Leeds. The plan is for a substantial rebuilding of the 14 storey building to construct a new entrance foyer and mezzanine reception with concierge style service. Bruntwood’s Craig Burrow said: “We are currently finalising our designs and expect to submit a planning application very soon. The specification will be Grade A as we target BREEAM Excellent rating but it will be priced to appeal to a wide range of occupiers. He added that Bruntwood had a 96% occupancy rate on its Leeds properties. “We aim to spot the potential that exists in parts of the urban fabric that others may disregard.”

Training companies set pace

In a slowly recovering market in Leeds, there is evidence of a shift in demand that has pushed training companies into seeking more space. That is good for the local economy and indicates a reaction to increased employment prospects but it also has a further significance, suggests Jeff Pearey of Jones Lang LaSalle. “It shows that what training companies provide is essential and that is recognised by the government who have, in effect, privatised part of the service to ensure that school leavers and older people are catered for.” He added that this is a good time for any occupier seeking space because there are “attractive deals available.”

Unlike some other parts of the UK, Leeds is not running out of prime office space. Figures from JLL show that take up in the first quarter was only 3,530 sq.metres (38,000 sq.ft.) with smaller sized deals continuing to dominate. “There will be an improvement in the second quarter,” said Pearey, ”because there are several significant deals coming through. The market feels better than a year ago and there has been an improvement in viewings.” The national picture has improved considerably with the second half of 2010 seeing a 36% rise in lettings in six top regional markets to a total of 510,950 sq.metres (5.5 million sq.ft.), reports JLL.

Training companies also featured nationally as seeking more space. Savills’ first quarter figures for development activity in the UK show that a large part of the country is considerably less active than London and the south east and that March saw a significant decline. The decline in development is mainly due to the public sector reducing its activity. According to Knight Frank in Leeds, prime rents will remain at £258.24 a sq.metre (£24 a sq.ft.), a decline of just over 10% since the peak of 2009. Alex Munro of Knight Frank commented: “Take up last year was 26,291 sq.metres (283,000 sq.ft.) or 45% below the ten year average.

New Grade A space available in the city centre was about 51,095 sq.metres (550,000 sq.ft.), which gives a vacancy rate of 11.6%, unchanged in the fourth quarter over June-September.” There is, however, a positive aspect to the figures because active demand is put at a healthy 39,018 sq.metres (420,000 sq.ft.).