NovaLoca Blog

Occupiers in the retail sector drove the recover in take-up of logistics space during the final quarter of 2010, says Gerald Eve in its latest bulletin on the prime logistics market. Total logistics take-up was around 10m sq ft in Q4 2010, which the firm says is the highest recorded in its key distribution regions since the last quarter of 2007.

Gerald Eve says the retail sector took up a total of 15.7m sq ft last year, the largest amount of annual take-up in the sector for a decade. And around 4.7m sq ft of this was pre-let, which Gerald Eve says shows how the spike in take-up of new, mostly speculatively developed stock has eaten into the amount of available new or refurbished space.

The firm also notes that manufacturing occupiers returned to average annual levels of activity in 2010, with take-up of about 7.5m sq ft. It says letting activity from this sector was weighted towards the second half of last year, both in terms of the size of the space taken and the number of transactions recorded.

The total availability rate for Gerald Eve’s regions at the end of Q4 2010 was 16.8% compared with 16.4% the previous quarter. It compares with the 17.2% seen in Q4 2009. Most of the space released to the market during the second half of 2010 was second-hand, the firm notes, with around 6m sq ft of such space added to the market during H2 2010. “Total availability is expected to remain elevated as tenant demand focuses on good quality space and the release of unwanted regional distribution space is returned to the market as a result of the recent pre-lets on large national distribution centres by major retailers,” it adds.

Gerald Eve notes that a significant overhang of second-hand stock has persisted as companies have been consolidating operations and focus on improving efficiency. The imbalance between new and second-hand stock has been worsened by the lack of new development, it notes, with only 5m sq ft of space completed during the year. “2011 is expected to be similarly subdued in terms of development,” it adds, “with purpose-builds again driving headline figures”.

The firm says the large requirements for space in the market will help to maintain headline take-up figures in 2011, but cautions on the outlook for consumer spending in 2011. “Whilst this is the most positive bulletin we have released for two years, there are strong economic pressures expected for the first half of 2011, which will undoubtedly suppress performance,” it notes.

The great and good of the property world were at the Dorchester Hotel yesterday for the annual lunch hosted by Heron International, at which chief executive Gerald Ronson said he thought the market was about a third of the way through the current cycle. He expects the “sun to start shining again” in 2014/2015, with the clouds likely to linger longest in the UK regions. While there might be opportunities in London and in prime property this year, Mr. Ronson feels that in the rest of the market “a large degree of luck, bravery and Alka-Seltzer” will be required.

Mr. Ronson noted in his speech that growth was unlikely to stem from businesses expanding into new office buildings, but said the cycle of lease renewals was “appearing on the horizon” and that, with businesses seeking better-quality space, the limited supply on offer would create positive dynamics in the market. He also noted that rental levels in the City of London remained highly attractive.

Banks are still sitting on piles of distressed assets, he warned, and he noted that in previous such situations new entrants had come into the market in order to get the development wheels working again. “Also, the insurance companies are setting up property debt vehicles, so new entrants with new financial models, and joint ventures are likely to help the property industry start to be a proper business again,” he added.

Mr. Ronson cautioned that it should no longer be expected that the Government would not exercise break clauses on its properties, and said rents were more likely to fall than rise outside London. He also noted that retailers were likely to shrink in numbers – and said the planning system was partly to blame for this, adding that he felt that politicians had not done enough in the past to regenerate areas outside London.

“We are not out of the woods, in fact there is a lot going on in the woods, but we can now see the wood for the trees,” he concluded.

Heron yesterday announced practical completion of Heron Tower, its office building in Bishopsgate in the City of London. Four lettings have already been secured, including for the restaurant and sky bar on floors 38-40 and for the ground-floor restaurant. McDermott, Will & Emery, the US law firm, moved in yesterday to its offices on floors 8-9, while floors 17-19 have been pre-let to serviced offices company Landmark plc.

The UK Green Building Council has today called for energy efficiency ratings to be mandatory for all commercial buildings in a drive to cut costs, encourage refurbishment and improve efficiency. The council says ratings on an A to G scale should be introduced as part of the Government’s Energy Bill, which is currently going through Parliament.

“For a variety of reasons the property sector is not routinely measuring accurate operational energy use from private sector non-domestic buildings and, as the saying goes, ‘if you can’t measure it, you can’t manage it’,” says the council in its report, titled “Carbon Reductions in Existing Non-Domestic Buildings” and launched today.

Display Energy Certificates (DECs) “provide both an ‘at-a-glance indicator’ and detailed technical information on the energy performance of buildings,” the council says. DECs are currently mandatory for public buildings over 1,000 sq m, but not private-sector buildings.

The council also wants landlords to be required to display DECs showing the energy efficiency of the services they provide. It says landlords must pass on data on their services to occupiers based on the Landlord’s Energy Statement, which has been developed by the private sector. It wants to see a phased roll-out of DECs for all non-residential buildings from 2012 onwards. By 2013 DECs could be automated by linking directly to utility metering data, cutting the costs involved, the report says.

The DECs should be used to draw up league tables of occupiers, landlords, sectors and buildings according to type and use, it adds, in a move it says could replace the current Carbon Reduction Commitment league table for organisations in the building sector.

Paul King, Chief Executive of the UK Green Building Council, said: “If you want to go on a diet, you first find out how much you weigh. The property sector urgently needs to go on an energy diet but to do so, it has to be able to accurately measure and report on its energy use. Display Energy Certificates do exactly that and should be rolled out to all buildings as soon as practically possible.”

“A to G ratings for commercial buildings will provide a reputational driver for both landlords and tenants to take energy use more seriously, leading to carbon and financial savings.”

Justin Snoxall, head of business group at British Land, which together with Cundall sponsored the work of the Task Force that drew up the report, said that the Government’s DEC experience in buildings since 2008 had led to many cases where public exposure of energy performance had produced action to cut energy use. “The opportunity is to replicate these successes in the private sector to influence future letting requirements of occupiers and to encourage greater action by occupiers and landlords together,” he added.

The vacancy rate for office space in London’s West End fell to 5.4% in the latest quarter from 5.9% in the previous three months, says Cluttons – the lowest level since January 2009. In some parts of the West End, such as Soho, the shortage of stock is even more acute, with a vacancy rate of less than 3%, Cluttons notes, although the market is strongly tiered with Grade A options very limited and Grade B space more readily available. The firm says the pressure will intensify over the next two years as a cohort of occupiers that took leases out in 2006/07 faces breaks or expiries.

Occupiers remain “ultra-cautious”, with the market driven mostly by lease events; Cluttons says the lack of available development finance has contributed to the lack of activity but notes that the London economy has remained more robust than that for the rest of the UK, “as a result of the greater than perceived diversified nature of the economy”. The financial sector has increased its presence in the West End over the past decade but the office market in the area benefits from a broader business make-up.

Speculative development did increase in the last quarter – space under construction went up 20% – but it is still below the 10-year average and more than 40% of the increase is in the Victoria area, with less than 15% of the pipeline in the highly sought-after Mayfair and St James’s markets. “We therefore expect pre-let pressures to stimulate further starts over the coming quarters,” Cluttons says.

Rents in the West End are forecast to rise by an average of more than 8% over the next four years, highlighting the need to fix costs early, the firm points out.

Hammerson has changed the plans for its Bishops Place development on Shoreditch High Street in London, reports the Telegraph, and now wants to develop a 591,000 sq ft office building on the site that will have some of the largest floorplans in the capital at 40,000 sq ft, alongside a tower containing 243 apartments. The Telegraph notes this £350m scheme will “drive expansion of the Square Mile beyond its traditional boundaries”.

The mixed-used project, designed by Foster and Partners, is now called Principal Place. The newspaper says it is understood that Hammerson will seek a pre-let before starting work on the development, and may also look for a partner on the residential part of the scheme. It quotes Martin Jepson, London managing director, as saying: “The evolution of the scheme means we can now offer a high quality differentiated office product to City occupiers at a time when there is modest supply for this type of building.” Hackney council is expected to decide on the planning submission by the summer. The development is due for completion in 2014.

Hammerson earlier this week announced to the London Stock Exchange that it had purchased a portfolio of retail assets from St Martins Property Investments for £208m, including the 65,000 sq m Centrale town-centre mall in Croydon; the 9,000 sq m Monument Mall in Newcastle; the 13,000 sq m Elliot’s Field retail park in Rugby; the 17,000 sq m Three Spires shopping centre in Lichfield; the 6,000 sq m Cathedral Lanes shopping complex in Coventry; and a 4,000 sq m Wickes retail unit in Folkestone. It said the yield on purchase price, after taking account of vacancy charges and other direct costs, was 7.0%, and noted it saw scope for value creation through the rejuvenation of the Croydon, Newcastle and Rugby assets. Hammerson also bought the remaining 75% of the Central Retail Park in Falkirk this week for £69m from its partner TIAA-CREF.

We at NovaLoca are looking forward to joining Hindwoods tonight as they celebrate their rebranding on HMS Belfast.

A nice choice of venue! We hope the weather holds out and perhaps we’ll see you there!

Following yesterday’s Budget, much of the initial analysis by the commercial property industry focuses on planning reforms. Philip Atkins, executive director of Planning at CBRE, says anything that removes delay and reduces uncertainty “must be welcomed”. However, he notes, “it shouldn’t be forgotten that the ‘prize’ of securing planning permission also creates development value.”

He feels that while presumption in favour of sustainable development is a positive step, some confusion – and a rash of appeals – will be created by the suggestion that local communities will dictate the use of brownfield land. He also notes that the proposal runs the risk “of empowering the better informed and influential minority within society to challenge almost all new development, halting or delaying much-needed growth.”

Roger Hepher, head of planning at Savills, points out: “There used to be a presumption in favour of development in the 1980s and ’90s, but it somehow got dropped from the legislation, and that gave succour to NIMBYs throughout the kingdom. At a time when economic growth is so important, it is right that it be brought back – but in a new form, reflective of the fact that climate change, energy conservation and other environmental concerns are now centre stage.” He notes that much of the detail is still to be announced – and he hopes that the government doesn’t spend so long deliberating over the definitions and regulations that opportunities are missed.

Stephen Robertson at the British Retail Consortium has welcomed the streamlining of the planning system: “A presumption in favour of development and removing unnecessary planning requirements will help economic growth and free planners to accelerate decisions where they should be involved. For example, it should be made easier to make internal changes to commercial buildings.”

The Budget also referred to changes to enable empty office buildings to be re-classed for residential use. Roger Hepher at Savills says the implications depend very much on the detail, but notes that it could have the effect of “opening up land for residential development that has hitherto been protected for employment purposes, especially in parts of London.” At CBRE, Philip Atkins says that while the move might be appropriate for individual office units that are well located near existing residential areas or town centres, it would clearly not be adopted where councils were keen to retain office floor space in order to meet the particular business needs of a community.

Banks are still only lending in limited amounts to the UK’s property sector, says Jones Lang LaSalle. The firm’s 2001 Lenders’ Expectations report shows that although more respondents this year were prepared to lend between £50m and £100m, fewer than 40% of those surveyed expected to lend above £100m by the end of this year – less than the 50% in last year’s report.

Many lenders to the property sector expect financing to pick up in 2012 with larger deals of more than £600m forecast in line with expectations for a recovering market. Activity will remain dominated by refinancing, with almost 50% of lending focused on this area, and a number of respondents said that refinancing would take up between 70% and 80% of lending.

The offices sector is the most popular by far for new lending, with an average weighting of 40% for each of the next three years. As might be expected, lenders like the transparency of the London offices market in particular – and the focus remains on prime investments, although some respondents think that the increasing amount of secondary assets forecast to come onto the market will become more financeable.

“Investors and agents alike are hoping new sales will spring in March after a very muted start to 2011,” says Savills in its latest research on investment in property in London’s West End. It notes that there were only 12 new opportunities marketed during January and February this year, which is well below levels seen during 2010 and 2009. Six deals were recorded in February.

“The reluctance to market is likely a function of the simple ‘Why sell now?’ belief, with rental values expected to be about to turn,” Savills notes. However, it notes that while there may be a shortage of sales of commercial property in the area during 2011, capital value volume is likely to be enhanced as more large lots come onto the market. It expects at least five sales of £100m-plus in March alone.

Savills says all owners of commercial property in the West End should be alert to the viability of residential conversion. There was another sale of a vacant office building to residential use in February, at Mellier House in Albemarle Street. Despite the revival in rents for available office space in the area and near-4% yields, residential values are repeatedly topping commercial prices – even outside the core areas of Mayfair, Chelsea and Knightsbridge, it says. “This will of course do nothing to alleviate the shortage of high-quality West End offices,” Savills notes.

At NovaLoca we are always keen to bring you the latest in technology – and keep our eye on commercial property – with the help of our fantastic web-based mapping specialists at Earthware. They have got hold of a great new piece of kit called a Puffersphere – a large sphere that can be used for indoor and outdoor display and advertising purposes.

Earthware have used the Puffersphere to incorporate a giant eye that, with the help of a Microsoft Kinect, can track a person moving around a room. Check out their “Boys’ own guide to building a giant creepy eyeball that follows you round the room”! Here you can also see NovaLoca MD Miranda Munn being followed by the Puffersphere. The interactive nature of the technology is bound to attract interest – let us know how you would incorporate it into advertising and display for your own business!

Untitled from NovaLoca on Vimeo.