NovaLoca Blog

Commercial development activity dipped during April after a strong March, according to Savills, which says its Total Commercial Development Activity Index reached a net balance of +5.1% in April – the eighth consecutive positive reading – down from +10.6% the previous month.

The net balance was at a three-month low in April, Savills notes, but still pointed to growth in activity over the month. While private-sector commercial activity expanded for the eighth month in a row, public-sector commercial projects declined for the second month running.

Around 22% of developers responding to Savills’ survey reported an increase in activity, but 17% indicated a decline.

Looking ahead, the level of positive sentiment weakened compared with March, with the three-month outlook net balance falling to +8.4% from +9.5% the previous month – although the reading remains positive, signalling continued optimism overall. Evidence from the panel indicated that this reflects the signing of new contracts: the lack of bank financing has, however, continued to cause concern.

CBRE says UK commercial property performance in April was largely unchanged from the previous month at the All Property level, with total returns reaching 0.6% compared with 0.5% in March. This took the annual return to 3.1% for the year to April 2013. Capital values, however, remained flat – and have fallen by 2.8% over the past 12 months, the firm notes.

Total returns for office property in CBRE’s Monthly Index increased to 0.5% in April, with capital values remaining flat month-on-month. Central London offices boosted the figures, with returns of 0.5%, and within this Midtown office space produced a total return of 0.9% and capital value growth of 0.5%. CBRE notes that Outer London/M25 offices recorded a small but positive growth in capital value last month – the first positive monthly capital value growth in this segment of the market since August 2011.

CBRE analyst Aleksandra Starczynska said: “The performance gap between Central London offices and other parts of the UK market has started to close over the last couple of months. Although it remains the best performing market segment, both rental and capital value growth has been slowing for Central London offices and at the same time performance in other segments has been improving.”

Within the retail sector, which recorded total returns of 0.6%, shopping centres had a significant impact, recording capital value growth of 0.3%. Overall retail capital values were broadly stable at +0.1%. Industrial property total returns were 0.5%.

Rents were flat at the All Property level, for the fourth month in a row. Central London offices did see more growth in rental values, with 0.3% growth for City office space and 0.1% for offices in the West End. Elsewhere in the UK, office rents declined by 0.2%.

Lambert Smith Hampton says the Manchester offices market has made a positive start to 2013, with first-quarter city-centre take-up of 271,000 sq ft compared with 170,000 sq ft a year ago and roughly in line with the 275,000 sq ft seen in Q4 2012.

The lack of available Grade A office space in Manchester has proved a major difficulty for some occupiers, especially those seeking larger floor plates, LSH notes. While the total taken up in Q1 2013 was steady, the quality of space occupied across Manchester has fallen, with Grade C offices accounting for two thirds of the total take-up in the quarter – an increase of 40% from the final quarter of 2012. LSH saw an increase in the number of larger office requirements during the quarter, both in the city centre and out of town. Availability of Grade A space actually rose by 75,000 sq ft in the city centre during Q1 to 1.24m sq ft following the administration of law firm Cobbetts, but out of town the firm says there is a “distinct lack” of readily available floorspace to satisfy requirements from larger occupiers.

The firm expects full-year take-up to reach about 800,000 sq ft, but notes that this does not include the much-publicised Project Tomorrow requirement – which would boost the region considerably if it were satisfied.

While some high-quality space is due to be delivered to the market over the next 12 months, there will be no new-build development until the middle of next year. “With a substantial amount of lease events (approximately 1m sq ft) over the next 18 months providing relocation opportunities, for those occupiers seeking to upgrade their accommodation supply is unlikely to meet demand,” the firm warns.

LSH says headline rents for Grade A office space across Manchester city centre remain unchanged at £30.00 per sq ft, and at £19.00 per sq ft for out of town business park accommodation. Prime incentives remain at 18 months for a five-year term.

Jones Lang LaSalle says 2.5m sq ft of office space in Central London was let during Q1 2013, the highest total since the end of 2010. The 863,000 sq ft forward sale to Google at King’s Cross certainly boosted this figure, but JLL says “demand does appear to be on an upward trajectory”. The firm also sees increasing signs that take-up of Central London offices will rise further during the rest of the year.

At the end of Q1 2013, the amount of space under offer was the highest for 18 months at 1.9m sq ft, and active requirements (adjusted for the Google deal) were up 13.6% over the quarter. Jones Lang LaSalle says the TMT sector is still the most important driver of this demand, accounting for 29% of the total compared with a historical average of 17%. But the firm also notes that demand and activity are increasing from the financial services sector.

Companies are still taking longer than usual to make decisions, says Neil Prime, lead director UK office agency at JLL, but as demand and take-up improve, they will have less choice and will have to act faster to secure their preferred properties. “Whilst we expect the recovery to be gradual initially, assuming a continued and improving sentiment in the global economy we could see a significant change in the supply/demand dynamics towards the end of this year and through 2014,” he adds.

Rents for West End offices rose in Q1 2013, for the first time in almost two years, as a result of rising demand and the continued scarcity of Grade A space in central locations, JLL says. The firm calculates that they reached £97.50 per sq ft in the quarter, up from £95.00 per sq ft, while City offices rents remained at £57.00 per sq ft. Despite this, supply overall increased 12.1% year-on-year during the quarter, and construction began on around 1.5m sq ft of new office space in Central London, including three major schemes in the City and the West End

The latest London Office Crane Survey from Deloitte Real Estate strikes a positive note, with 9.7m sq ft of office space in Central London now under construction – the highest for four years and an increase of 8% over the past six months.

Letting activity is also up on buildings under construction, with 33% of space under construction in Q1 2013 pre-let – “the equivalent to six Shards,” the firm points out, compared with just 1% in 2011.

Anthony Duggan, partner and head of research at Deloitte Real Estate, says the rising construction and leasing activity reflect the improving sentiment in the London office market. “Importantly, a number of the ‘bellwether’ vacant schemes across London are now transacting, reducing the ability of potential occupiers to sit back and wait for conditions to improve. This is likely to add a little more urgency into the leasing market over the next few months,” he adds.

In the City, nearly 4.5m sq ft is under construction, up 10% since the previous survey in November 2012. After the lowest level of office completions in the Square Mile for more than 25 years in 2012, the market has readjusted back in favour of the landlord, Deloitte Real Estate says, as the supply of existing space begins to reduce. Occupiers are now starting to find themselves in competition for reducing tranches of space, the firm adds. Leasing activity of City office space under construction has almost doubled from six months ago.

A total of 1.6m sq ft of West End offices will complete this year, the firm says, as developers in this area were quick to react to the improving conditions after a low level of completions in 2011. This is the highest level of completions for seven years. Occupier sentiment is improving, according to the survey, despite the relatively high availability of Grade A stock. While 400,000 sq ft of Mayfair office space will be delivered this year, the main focus is on other areas of the West End. “North of Oxford Street and Victoria particularly are emerging as attractive locations with developer confidence driving construction activity and occupier demand driving rental rises of 74% and 51% respectively (since 2009),” the firm says.

Some smaller office submarkets in London are also gaining momentum, with King’s Cross seeing a 68% jump in new floorspace since the previous survey and now with 800,000 sq ft under construction. Midtown now has 722,000 sq ft under construction and Southbank 982,000 sq ft, Deloitte Real Estate points out.

At Knight Frank’s well-attended M25 breakfast earlier this week, the firm’s head of South East Investment said demand for offices in the South East of England and the M25 region is arguably as strong now as at any time over the past six years. But the lack of available stock in the region could be its biggest challenge – new development is needed now, or some occupiers could be forced to look elsewhere.

Tim Smithers says the South East office property market is attracting buyers from around the world, and expects a continued healthy appetite during the next 12 months, with opportunity funds and Middle Eastern private funds under pressure to invest. “We are also seeing increased interest from the US, Australia, Far East and Israel,” he noted.

In order to achieve the best return, investors in office property in the South East and M25 region need to re-think and re-position their assets, Knight Frank says. Emma Goodford, head of National Offices, says the desire for new office space in the M25 region “is creating rental growth as new buildings are being snapped up”.

Smithers says that whereas a year ago only the very best stock attracted buyers, now there are buyers for most stock – but not enough products. He predicts that prime and good secondary yields will continue to harden for the rest of the year, as UK funds and overseas private funds are priced out of London. He also says secondary buildings in core markets will continue to offer good value, particularly where the rents are sustainable. “The occupier market is improving and investors will take on letting risk in search of higher returns,” he added.

Looking at the M4 corridor, Knight Frank says demand for office space in this area is running 10% ahead of its 10-year average – a strong performance in contrast to most other UK office markets, including the M3 and the M25 region as a whole, with all but the markets for Aberdeen offices and office space in Leeds showing take-up running below annual average. The firm says speculative development is becoming increasingly justified in key locations such as Reading, Guildford and Brighton, which all have less than four years’ supply of new Grade A space, while Staines has just 2.5 years’ supply, despite four new schemes under way. Rents of £30 per sq ft have already been achieved in Reading and Maidenhead, Goodford says, “and figures above this are predicated in a handful of towns including Staines on Thames and Uxbridge”. She feels this rise looks justifiable and sustainable, as the West London offices market is now in the mid £40s.

“We’re finding it hard to identify new schemes which will provide quality space in 2016 and onwards, just at the time many large occupiers will be able to upgrade. I can forecast a situation where lack of new space will collide with rising take-up – a perfect cocktail to stimulate speculative development,” she added.

Service charges account for a significant proportion of total operating costs for most office occupiers – but tenants often overlook them when negotiating a lease. Lambert Smith Hampton points out that tenants tend to focus heavily on rent payable but “almost sign a blank cheque for their service charge liabilities”.

The firm has published a guide to checking and challenging your service charge – it recommends that you check to make sure charges are reasonable, that you are not paying to upgrade your landlord’s premises, you have enough information to budget wisely, and that your landlord is adhering to the RICS Service Charge Code of Practice.

To help you identify opportunities to save costs, Lambert Smith Hampton says it is important to recognise the following common scenarios: Is there vacant space? Has your service charge liability or insurance premium increased? Has your landlord got into financial difficulties – or even gone into administration? And do you know about any recent refurbishment or environmental upgrades to the property?

The RICS Code recommends that tenants receive a budget one month before the service charge year begins; and a service charge certificate within four months of the year-end. The budget and certified accounts should include appropriate explanations; management fees should not be based on a percentage of expenditure; and the tenant should be advised if costs rise by more than 2% above the budget at any point in the year.

Recent data from the Bank of England shows a growing willingness among lenders to finance commercial property deals. Jones Lang LaSalle notes that the Q1 2013 lending figures from the BoE report that UK bank exposure to real estate remained stable at 8.2% of all debt, despite the continued deleveraging by UK banks.

Peter Clarke, head of Jones Lang LaSalle’s valuation advisory team in Birmingham, says lender appetite for financing commercial property in Birmingham is increasing – not only among the main high-street banks, but also among more specialised lenders. He notes that some lenders are taking advantage of the Funding For Lending scheme, which has been extended by 12 months. JLL feels this may help to “further underpin the market recovery”.

There have been a number of prime Birmingham office property sales, he notes, where investor interest has been strong, but he feels the debt market is now being constrained by a lack of investment transactions – a reversal of the conditions seen earlier in the current cycle. “What is perhaps holding back the debt market is the unwillingness from some owners to consider a sale unless they are forced; there is a perception that values will improve and a better return could potentially be realised,” he adds.

Property investors are also seeking secondary stock at discounted values, as a result of the weight of money seeking a home, where an attractive annual return can be obtained, he adds. Most banks are unwilling to lend on this type of property, he notes.

sbh Page & Read has announced the letting of unit 5B on the Triumph Trading Estate. The 3,025 sq ft industrial unit in Tottenham has been let for a year to STV Building Services at an annual rent of £22,687.56. In Enfield, the firm has also let Unit 2, Progress Way; this industrial unit in Enfield measures 13,380 sq ft and has been let to Ekin Cash & Carry on a five-year lease at an annual rent of £68,907.

A Hertford industrial unit measuring 4,272 sq ft has been let to Rock & Co Granite on a five-year lease. The property on Merchant Drive in Hertford has been let at an annual rent of £23,500. sbh Page & Read has also agreed a ten-year lease on an industrial unit in London – Just Samples will pay an annual rent of £70,296 for the 8,787 sq ft property at Guillemot Place in London N22.

Recent sales announced by sbh Page & Read include Unit 16 on Lockwood Industrial Estate in London N17, a 5,006 sq m industrial property sold for £495,000 to the London Symphony Orchestra. The firm has also sold some former garage workshops on the North Circular Road in Palmers Green in London to Enterprise Rent-A-Car. The 0.23-acre site has been sold for £870,000.

At Sterling House, the firm has sold 11,238 sq ft of office space in Potters Bar to JSM Construction for £1.25m. It has also announced the sale of an industrial unit in Edmonton – a 2,122 sq ft unit on Bull Lane – for £220,000, and the sale of retail premises in Hoddesdon, where a 2,719 sq ft property on Rye Road has been sold for £390,000.

You can find further information about properties in all these locations on NovaLoca.com, and click here for full listings of all properties available to let or for sale through sbh Page & Read.

More evidence of increased activity in UK regional office markets during Q1 2013, this time from Knight Frank, which reports a “notable” rise in take-up and a number of markets exceeding 2012’s quarterly average. Net effective rents rose across the regions, particularly for Cardiff offices and Birmingham office space, the firm adds, reflecting a combination of lower Grade A supply and steady levels of demand.

Grade A space decreased 11% overall year-on-year, with a lack of completions resulting in double-digit falls in Grade A availability in Birmingham (-33%), Leeds (-14%), Glasgow (-13%), Manchester (-13%), Newcastle (-12%) and Liverpool (-10%), Knight Frank says.

Requirements were healthy in Q1, with “remarkable” increases of 60% for offices in Newcastle and 36% for Aberdeen office space, Knight Frank adds, although the majority of this interest is for office space up to 5,000 sq ft.

“We are now into a full pre-let market for those occupiers seeking Grade A Office space of, say,  in excess of  50,000 sq ft, or less in certain regional centres,” says David Porter, head of Knight Frank’s Manchester office. He adds that the lack of good-quality accommodation is driving interest from some of the larger UK developers, “who see the more active regional markets, such as Manchester, Aberdeen and Birmingham, as an attractive offer outside of London/ South east”.