NovaLoca Blog

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”. 

Miranda Munn, founder of NovaLoca.com, has been looking into the question of how levels of enquiries about available commercial property on the NovaLoca.com site vary with property size. Her research, following a recent meeting with Dowley Turner, shows that in general smaller-sized instructions receive proportionately more enquiries than larger schemes.

“I had a look at the sizes of all available commercial properties and schemes listed on our site and compared these with the number of email enquiries generated over the last year for properties within the various size ranges,” she says.

Property listings of over 100,000 sq ft (or with a combined total area of over 100,000 sq ft) account for 5.7% of all listings on NovaLoca, but receive only 3.5%* of the email enquiries, she notes.  Properties of less than 1,000 sq ft account for 9.5% of listings but receive 13.2% of enquiries.

The size group that appears to do best is properties in the 1,000 sq ft to 5,000 sq ft category, she adds. Although these represent only 27% of the stock, they receive 32% of enquiries. This contrasts with the group of properties in the 10,000 sq ft to 25,000 sq ft category, which account for 26% of the available commercial properties but achieve only 21% of the enquiries, she points out.

*This research looks at all commercial property listed covering office, industrial, retail, leisure & land, where a listing or scheme covers a range of sizes bandings are taken as the maximum size available.

Total occupier take-up of office space across the UK’s ‘Big Six’ regional markets reached a million sq ft in Q1 2013, says Jones Lang LaSalle. This is an increase of 25% compared with a year earlier; although there were regional variations, the total figure was 15% ahead of the three-year quarterly average level of 880,000 sq ft.

Jones Lang LaSalle says the total was boosted by strong activity in Manchester offices, and the return of pre-letting activity for Leeds office space – although it notes that pre-lets are expected to remain rare. The firm says the decision by Bristol City Council to purchase 100 Temple Street for owner occupation “further strengthened the regional picture”. Jeremy Richards, head of Jones Lang LaSalle’s regional office agency, adds that “current demand levels, coupled with two new speculative developments in Glasgow, give cause for encouragement and buoy optimism in the market”.

Vacancy rates across the markets for offices in Birmingham, Bristol office space, Leeds offices, Manchester office space, offices in Edinburgh and Glasgow offices fell from 12.7% at the start of 2012 to just 12.2% in Q1 2013, JLL says.

The firm cautions that while overall supply is gradually being absorbed, vacancy rates remain stubbornly high in some locations. It notes that although the average Grade A vacancy rate across the Big Six markets was just 3.1% at the end of Q1 2013, the development pipeline remains relatively constrained, with only 860,000 sq ft under construction – of which 697,000 sq ft is speculative. However, there are some signs that confidence is beginning to return, marked by two new speculative schemes starting on site in Glasgow, and another beginning in Bristol during Q2. The lack of Grade A supply will continue to drive rents for the very best space, JLL notes – it forecasts aggregate growth of 3.4% per year during 2013-2017 in the major UK cities.

JLL estimates that more than 2m sq ft of office stock in the Big Six markets has been converted into alternative uses in the past two years. Jeremy Richards points out: “Refurbishment of obsolete stock could help to alleviate overall vacancies as well as providing much need new Grade A supply in the regions and some assets, which are unsuitable for refurbishment, could potentially be converted into alternative uses.”

The Scottish Property Federation has welcomed the draft version of two key planning documents for Scotland – the third National Planning Framework (NPF3) and the draft Scottish Planning Policy (SPP). These propose changes to Scotland’s planning system that put greater importance on supporting sustainable economic growth, it notes.

The two draft documents “influence how planning authorities deal with all planning applications and establish a vision of the core values and purpose of the planning system”, the Scottish Property Federation says. It adds that Scottish ministers have also reinforced the importance of SPP as a material consideration – a move the federation has supported.

David Melhuish, director of the Scottish Property Federation, says these proposals “are a step in the right direction” towards achieving a growth-focused planning system that will spur job creation. “The commitment and vision of the SPP and NPF3 must also be supported by taxation and regulatory choices, for example on property taxation and building standards that are competitive and proportionate,” he adds. “Otherwise we may deter investment and frustrate the ability of the private sector to drive economic recovery in Scotland”.