Professionals like space

Although the regional office market was boosted by a number of large deals in the second quarter, such as the Ministry of Justice and Deutsche Bank in Birmingham, the lower end of the market is still the most active. That is the view of DTZ in a report that also highlighted the strengthening demand from smaller professional firms.

Apparently some of these were on flexible terms during the economic downturn, but are now seeking to take advantage of the current market to upgrade to better accommodation.

It could indicate an improved market for new developments in the Midlands in the main cities. Matthew Long of DTZ said: “Take up in Birmingham in the second half is forecast to reach 18,580 sq.metres (200,000 sq.ft.).” He reiterates the problem that Grade A stock will continue to fall so that rents will edge up in early 2012.

In fact the new lettings are an important indicator of the market situation with the Law Society likely to move its Midlands headquarters to the 5,110 sq.metres (55,000 sq.ft.) 2 Colmore Square developed by Nurton; accountants Grant Thornton expected to take half that amount in Colmore Plaza and another accountant, Boomer Heaven, moving to Rutland House. Note that they are all professional service organisations. International players such as Hines have experience of when to move into markets.

In the case of Birmingham its Pan-European Core Fund has bought the 3,998 sq.metres (43,040 sq.ft.) One Eleven Edmund Street from IVG for an undisclosed sum. It also owns Brindleyplace and Two Snowhill through other vehicles.
Derby has also improved with a number of new developments. Tesco plans a large store at Allanton while at Sandiacre it will go for a mixed use scheme including a store. But the largest development is on a 15 acre site of the Derby Royal Infirmary for a Morrisons supermarket, hotel, offices and 400 homes.

Timing

Mike Slade of Helical Bar is renowned for the timing of his deals that catch the market on the move in either direction, up or down. So Helical Retail’s purchase of a 53,000 sq.metres site at Reddings Lane, Birmingham from Eaton Electric is a positive point for the city. This company is a joint venture of Helical Bar and Oswin Developments of Solihull. Helical Retail plans a 6,976 sq.metres (75,092 sq.ft.) Asda supermarket and a similarly sized retail park.

This is part of a large (£50 million) regeneration plan which includes an industrial scheme being developed by Mucklow.

Look ahead

Now is the time to move away from the stifling worry about the economy and look ahead to a healthier situation of growth, That would seem to be the message from Birmingham where the council is going for a Big City Plan for future development in 2,000 acres of the city centre with one of the government’s new enterprise zones.

Of course, the city has been pursuing an enlightened urban renewal programme for years, including using funds from the European Union for some projects. It is now applying for £20 million from the European Development Funds (ERDF) to help the development of business accommodation, office and industrial projects.

There are a host of private sector developments in the pipeline, many of them stalled by the fragile economy. A new scheme is from Sahlia Investments of Kuwait for a mixed use scheme costing £150 million in the Beorma Quarter and is adjacent to the Selfridges store and the Bullring Shopping Centre. Sahlia is seeking funding for the scheme from Barclays Corporate for the 60,199 sq.metres (648,000 sq.ft.) which will have a 200 bedroom aparthotel and a 27 storey 31,603 sq.metres (340,183 sq.ft.) office block together with a refurbished cold store.

The improvement in the urban areas are also a priority, hence the work on Church Street public realm in Colmore Business District (CBD). This high quality designed area will bring wider and new pavements, landscaping, trees and other associated works.

CBD which is one of four business improvement districts in the city centre is contributing £250,000 towards the total cost of £750,000 for the project. Gary Cardin, Chair of CBD said: “The new square will add to the public realm improvements promoted by us across the commercial heart of Birmingham and be a showcase for high quality, pedestrian friendly open spaces.”

These improvement plans come at a time when the city centre office market is only in moderate health, although the second quarter take up was 14,678 sq.metres (158,000 sq.ft.) mainly due to several large lettings, such as the Ministry of Justice for 3,530 sq.metres (38,000 sq.ft.) at Axis, But the Grade A stock has now fallen again, continuing the three year long process. Craig Satchwell of Colliers International said: “Grade A stock is now at its lowest level for three years.

Worryingly, there is just one scheme with a speculative element currently on site, Hines and Ballymore’s Two Snowhill, which will not be completed until 2013.” He predicts that there will be an increase in refurbishment of existing properties together with pre lets for speculative schemes.

Static rents

Surprisingly, perhaps, rents for logistic and warehouse space in the Midlands has remained static over the past year. That is the conclusion of Colliers for its Logistics and Industrial Big Sheds Rent Map for 12 locations. The survey reveals that prime rents are actually below levels of 5 years ago, which also applies to secondary space.

But the picture is changing. Simon Norton of Colliers said: “Take up of Grade A space in the past three years has started to eat into existing supply, resulting in signs of severe stock shortage. The lack of speculative development has exacerbated the situation. For the first time in years, landlords are beginning to feel they may just have the upper hand and are holding out for better terms.”

He makes the point that developers and investors realise that land prices, which have fallen in the past 5 years, will now rise.

Worcester based agent, Halls Commercial, makes that point in its marketing of the Corbett Business Park, Stoke Prior, near Bromsgrove. This has a total of 10,108 sq.metres (108,800 sq.ft.) in an office and two warehouses but also a six acre plot for further development. One attraction is being within two miles of the M5 motorway. Halls’ Richard Tomlinson said: “Corbett Business Park provides a good opportunity for manufacturing or distribution companies who are considering relocating.”

He adds that “the shed market has held up very well and we are getting to the stage, particularly around Worcestershire and south of Birmingham, where there is a distinct lack of supply of big sheds.” Also on the market, through Jones Lang LaSalle, is Canmoor’s 10 acre site on the M54 with its outline planning for a 17,187 sq.metres (185,000 sq.ft.) warehouse. “The plot is well placed for industrial/warehouse premises,” said Carl Durrant of Jones Lang LaSalle. “Few opportunities exist in the Black Country for prime land with planning and we are expecting the plot to generate a lot ofinterest from occupiers.”

Jones Lang LaSalle is also handling a 9,290 sq.metres (100,000 sq.ft.) manufacturing plant for the Bamford Trust close to Junction 2 of the M5 which was formerly occupied by Pilkington Glass.

Buying secondary space

In an improving investment market, secondary markets in the West Midlands are in line for increased activity.

That is the view of DTZ ’s Money into Property 2011 report which predicts a 4% increase compared with 1% in 2010. DTZ notes that the 4% is modest in comparison with global invested stock which is due a 9% rise this year. Nick Allan of DTZ said of the Midlands market: “The big opportunity is behind us in the UK prime markets. With prime property fairly priced, investors will begin moving up the risk curve, targeting non-core

markets for opportunities.”

This process is being helped by increased lending in the process of banks and institutions working out their debt on property, a process which is well established in prime real estate. Allan said: “Activity in the secondary market is increasing, with opportunistic investors, many of whom raised funds some time ago, keen to invest. More properties have become available as lenders start to take action on defaulted loans. For example, at the end of 2010 Saltley Business Park was sold on behalf of Lloyds Banking Group for £23.285 million for a yield of 9.49%.”

One prime property that could come onto the market is Aegon Asset Management’s 55 Colmore Row. The owner has asked Abstract Land to review the 11,613 sq.metres (125,000 sq.ft.) property which could include a sale. It was leased by the law firm Wragge & Co in the early 1990s.

One deal that has gone through is the sale of the Caxtongate block of retailing in New Street, Birmingham where a client of LaSalle Investment Management has paid Cosgrove Group £16 million through Jones Lang LaSalle and Lewis Ellis for a yield of 6.5%.

Landing on Pegasus

Colliers has joined Fisher Hargreaves Proctor in marketing the expansion of Pegasus Business Park, a venture of East Midlands Airport and MAG Developments.

The 20,903 sq.metres (225,000 sq.ft.) office park will have a new 216 bedroom Radisson Blu hotel later this year and has another 25 acres available for high class offices. FHP’s John Proctor said: “When it was launched, the park proved to be highly successful and it remains one of the biggest in the region, but, in terms of the regional office market, it has slipped from the mind’s eye somewhat.” He suggested a new promotional campaign will work now the park has a new hotel adding to the attractions of being equidistant between the three major conurbations in the East Midlands.

Hitting the target

A vote of confidence in Target Park, Redditch has come from removals and storage company, Johns of Studley which has added a further unit in the second phase of the £12 million development.

This adds to its initial unit where it was the first company to move into the estate. John Finn of Johns said there has been a strong growth in business and gave the example of its client Nissan where “car production has never been busier.” Joint agents are John Truslove and KGA. Anderman & Company is also expanding by relocating its entire Midlands operation to Xylem Development’s Cortex scheme at the Hartlebury Trading Estate near Kidderminster. The company is buying a unit for its businesses which focuses on the distribution of industrial ceramic products and specialist engineering support services for high voltage electricity substations.

John Lewis leads

Rebuilding New Street is vital to the Whitby vision so it is encouraging that Network Rail, on behalf of the council, has submitted a planning application for a 23,225 sq.metres (250,000 sq.ft.) John Lewis store in a regenerated Pallasades Shopping Centre over the station.

As one of the retailer’s largest stores outside London, it is the anchor for the shopping centre, which is being designed by Foreign Office Architects and opening in 2014. This is, of course, part of the proposed EZ.

Winning formula

Another well located industrial estate in the Midlands is the 25,959 sq.m. Kelvin Way Trading Estate, a mile from Junction 1 of the M5 at West Bromwich. The refurbishment has been a success and pulled in a range of companies, such as Reliant Products, Safety- Kleen and Joseph Joseph. The estate is being marketed by Bulleys and Harris Lamb. Adam Priest of Bulleys said: “The estate has proved hugely popular with

a wide range of businesses, including manufacturing, government departments and storage operators. One of the occupiers, Reliant Products, found the location so suitable for its staff and customers that it has, said the company’s Managing Director, John Allen, “already expanded on the site and taken new units to accommodate our growth.”

Hark watches Portas

As confidence in the property market rises, so the appetite for town centre regeneration becomes sharper. Historic plans are being reassessed and new schemes being given the green light.

That is the experience in the Midlands where Compendium Living, the joint venture of Lovell and the housing association Riverside, has been selected for the Urban Village scheme in Derby.

This is a large urban scheme of commercial space and 800 residential units together with community facilities with the first phase scheduled to start in Spring 2012.

In Telford, Hark Group, which owns the 92,900 sq.metres (1 million sq.ft.) shopping centre, is examining its long desired plans for redevelopment. One reason for the review is that the government has appointed Mary Portas to examine the current situation of high street retailing in the country.

Hark want to develop a multiplex cinema and new restaurant complex. A spokesman for the company said: “Recent positive developments at both national and local level have prompted us to consider how best to continue the growth of Telford town centre,” Those words will hearten other owners of town centre sites.

Government backing

The government would appear to recognise the importance of pushing for economic growth in Birmingham because it has given the city a Regional Growth Fund grant of £15.7 million. The money will be used as part of the funding of a £37 million scheme to improve the A45 road near Birmingham Airport. Apart from the government, the transport authority has contributed £10 million and the airport £7 million.

They have combined with Birmingham and Solihull City Councils to apply for the government money. Birmingham City Council leader, Mike Whitby, said: “The upgrading of the A45 will bring significant transportation and economic benefits to the region and will also remove the current constraints the road alignment has on the proposed runway extension.”

When he became council leader in 2004 he made rebuilding New Street Railway Station and extending the runway at the airport key elements in making Birmingham a globally relevant city.

Bring on the Big City

With its intense commitment to making Birmingham a world class city, the council is expecting a major boost to its plans from the creation of an Enterprise Zone, (EZ) in the city centre.

The logic of its Big City Plan is that the 304 acre centre covering five areas (Southern Gateway, New Street Station South, Westside, Snow Hill and Eastside) is the key to the economic future of Birmingham.

So it maintains its long term ambition which has already seen considerable change with the EZ offering the prospect of 1.49 million sq.metres (16.1 million sq.ft.) of new floorspace. The EZ also includes the site of a new railway station for the High Speed 2 rail link to London. That, combined with a rebuilt New Street Railway Station, will give the city exceptional transport links to boost economic growth.

Jones Lang LaSalle’s Peter Leaver commented: “The city core is the most effective location for an EZ because it will have the greatest ripple effect.” Like other property professionals, he believes an EZ will speed up regeneration.

Certainly the lessons of the 1980s are that EZs can play a significant role in boosting economic growth and changing cities, as witness London Docklands and Salford Quays. As far as the Midlands is concerned, Nottingham has already been granted an EZ for the Boots campus.

Meanwhile, Hines and Ballymore are to directly develop the key site of Two Snowhilll which Colliers International said would alleviate the looming office supply crisis. The firm’s Craig Satchwell, who advised Hines, said: “Two Snowhill will be the first significant office development outside London constructed post credit crunch with an element of speculative space. It will come to the market in 2013 when most of the existing Grade A space is likely to have been absorbed. This will not only help to boost supply it will also help attract inward investment.” Colliers International’s figures show that take up of office stock in Birmingham is the highest for five years with total occupancy up 20,608 sq.metres (221,825 sq.ft.) in 2010. Hines has already shown its commitment to Birmingham in joining with Moorfield to buy eight buildings at

Slow improvement beckons

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.

No more bargain?

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.

Opportunity Knocks

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.”

New lettings for a new year

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.”

BMW Moves

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.

More Hotels for Lincoln

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.