NovaLoca Blog

King Sturge research has shown that Birmingham came top of the list for international property investment in the UK outside London in the first half of 2010. The Birmingham Post quotes Richard Goodhall from King Sturge as saying that the findings came as “something of a surprise”.

Investment across the regions rose to £714m in H1 2010 from £438m in H1 2009, with Birmingham ahead of Bristol, Edinburgh, Glasgow, Leeds and Manchester. Key deals in Birmingham included the purchase of Rutland House by Aviva Investors for £27m from Seven Capital, and the £29m acquisition of 2 St Philip’s Place by the investment arm of SEB Asset Management.

The largest Birmingham deal by far in H1 2009 was the Brindleyplace transaction, when Moorfield and Hines combined to acquire five prime office buildings in the complex for £195m.

PS this week Giles Barrie has written in Property Week that the property industry still resembles a stag party. He says that few women “understand the variety, challenges and characters that abound in the world of real estate” – so send NovaLoca your best examples at info@novaloca.com and we might just be able to provide those young jobseekers with some entertaining reasons to join the property industry…

Hansteen Holdings, the listed REIT that invests in industrial property in the UK and continental Europe, today said it was ready to take advantage of opportunities to buy UK properties from banks and administrators at “good prices”, as it announced a 5% dip in NAV per share to 80p as at 30 June, down from 84p at the end of 2009, as a result of adverse currency movements. The total value of the group’s portfolio, much of which is in Germany, rose to £721.9m at 30 June from £422.8m a year earlier.

Chairman James Hambro said the group expected opportunities for capital growth to be limited, given the current economic outlook. The group would “focus on generating a high income surplus from our assets while continuing to acquire assets capable of significant capital growth once the markets recover,” he added.

Hambro said the markets in all countries in which Hansteen operates remained “very tough” but added that occupancy had broadly stabilised throughout the portfolio and noted signs of increasing occupier confidence in Germany in particular.

While you’re still reeling from yesterday’s record-busting retail letting on Oxford Street, here’s some more news on the market for retail space in the UK. Cushman & Wakefield says the average availability of retail premises on the top shopping streets in the UK fell to its lowest for 18 months at the start of August, reaching 9.8% compared with 11.1% in May.

C&W’s research includes shops held by retailers that are in administration, which accounted for 1.4% of the total stores surveyed. Its analysis covered the key retail streets of the UK’s main town and city centres – not including out-of-town shopping centres, factory outlet centres or retail parks. The group says that while caution persists, there has been a marginal improvement in retail market sentiment over the past six months, which appears to have filtered through to retail availability levels. “Stronger operators are capitalising on previous failures and expanding their market share,” C&W says. It thinks the worst of the “shake-out” among retailers as a result of the economic downturn is now over.

Looking at the retail centres individually, the lowest levels of available retail space at the start of August were in Central London (5.1%) and the North (7.7%). Outer London has the highest level of availability (17.4%), followed by the Midlands (12.1%) and Scotland (11.0%).

John Strachan, head of retail at Cushman & Wakefield, said: “The recent decline in retail availability, whilst marginal, is encouraging and we remain cautiously optimistic that the overall level of availability will continue to edge downwards in the coming months. However, it is clear that retailer demand and therefore availability will differ widely by location. For example, Central London continues to see very strong retailer demand, as do large cities such as Glasgow and Liverpool where availability has continued to fall. In contrast, some smaller towns continue to struggle to attract significant retailer interest and availability in these locations is expected to remain high for some time to come.”

We’re taking a few days off now – and like all property professionals we will of course be reading the BPF’s new Property Data Report on the beach…

Spanish fashion retailer Desigual has beaten off stiff competition for a key retail space on London’s Oxford Street, paying a record rent and suggesting that other retailers in the area may face sharp increases in their own rent levels. It has been clear for some time that retailers in the West End are enjoying buoyant sales, but this deal has nevertheless caused considerable comment and speculation.

Desigual is paying a Zone A (prime area) rate of just over £700 per sq ft for 360 Oxford St, a 7,000 sq ft site opposite the Bond St tube station, replacing the Disney Store which reportedly paid a Zone A rent of £540 per sq ft to landlord Prupim. The Sunday Telegraph notes that the new Desigual rent is well above the previous Oxford Street record of £615 per sq ft set by Sunglass Hut in 2009, and comes despite the economic downturn and worries about consumer spending.

The Sunday Telegraph says it understands that retailers on this key London shopping street have seen recent rent demands increased by 20%, while The Independent says shops on Oxford Street now face increases of as much as 40% in their rents as the Desigual deal will be used as a bargaining tool in future negotiations between occupiers and tenants.

Desigual is said to have beaten off three rivals to the site – Mango, another Spanish retailer; shoe retailer Aldo; and mobile phone group O2. The Disney store is moving down Oxford Street to a site previously occupied by fashion retailer Mexx.

Savills says the market for available office space in Manchester is set to continue to be split into two tiers. The group says demand remains strong for larger floorplates, which are becoming more scarce, but there has been a distinct lack of interest from occupiers for floorplates below 10,000 sq ft.

James Evans, office agency director at Savills, says there is a noticeable divide in the market and fierce competition between landlords for smaller enquiries. “This is set to continue in the short term although with no new completions set for 2010, looking forward we expect that those occupiers seeking to relocate will need to compromise on some of their criteria, the main one most likely being the ability to relocate to one floorplate. This should provide some welcome light at the end of the tunnel for landlords of smaller properties,” he adds.

Savills says research predicts that the take-up figure for Manchester offices for 2010 will be over 1m sq ft. This includes the proposed Co-op commitment to 328,000 sq ft. During the first half of 2010, 318,004 sq ft was taken up, of which 34% was Grade A. The group Savills says the professional sector dominated demand, accounting for 24% of the H1 2010 take-up.

The group says headline rents for offices in Manchester have remained fairly resilient and currently stand at £28.50 per sq ft. As the development pipeline is muted, Savills expects prime Grade A rents to rise, and rents for smaller, secondary space to fall further in the short term, with incentives firmly set in the tenant’s favour.

King Sturge says confidence appears to be returning to the Thames Valley offices market. During the first half of 2010, 661,000 sq ft of office space in the region was taken up, which is a 42% increase on H1 2009. “On this basis, it is likely that 2009 was the low point for take-up in the current cycle,” the group says.

King Sturge notes that demand remains strong for the right product for investors in the Thames Valley area, and thinks the unprecedented shift in yields seen in the final quarter of 2009 is unlikely to continue to the same extent this year. During Q2 this year, yields for prime office assets remained steady, while secondary yields moved out, it adds in its Thames Valley Offices Q2 2010 report.

With regard to rent levels in the region, King Sturge says it feels that headline rents are now starting to level off after a period of decline. “A two-tier market is emerging where well-located, Grade A space will begin to see growth in net effective rents, but incentive levels will remain generous for more secondary stock,” it says.

Meanwhile, the office agency team for the Thames Valley at Lambert Smith Hampton has also been busy compiling its annual report into the market for office space in the area. It says that overall take up for 2009 was just 1.1m sq ft compared with 2.7m sq ft for 2008.

Nick Coote, head of LSH’s Thames Valley offices team, says that there are now signs of increased activity going forward. “We anticipate, so long as a double-dip is avoided, that the second half of the year will see increased levels of take-up. As forecasted last year, the supply side of the office market has remained relatively stable. As increased levels of take-up materialise, we can expect to see the market supply issues (shortages of quality stock) become exposed in some locations.”

LSH says that although some current transactions are very low-value, this may in fact indicate a better market dynamic going forward, as they reflect the fact that deals are actually being done. “Fatigued vendors are chasing down the early occupiers and, if they are followed by others, the market will start to regain its confidence and equilibrium,” the group says. “This will be reflected by a tightening of incentive terms and rental growth, particularly where low supply levels of quality offices are quickly exposed. However, this will be a longer process for some centres [in the region].”

DTZ says its new, forward-looking property index indicates that there are only three areas in the UK that currently offer commercial property investors attractive terms.

The group calculates these three areas as: office space in the City of London; prime retail property in Manchester; and retail premises in the West End of London, assuming they are held for the next five years.

DTZ created its Fair Value index based on 180 property markets worldwide. The group’s global head of research, Hans Vrensen, told The Times that although yields on City offices had dropped steadily, supply remained constrained. In particular, he noted, large floor spaces were hard to find, so DTZ is expecting to see rental growth coming through as the economy recovers.

The expected return on City office space according to the index is 10.9% compared with an estimated required return of 7.6%, making this a “hot” category – it implies that offices in the Square Mile are underpriced by 11.6%, according to DTZ. But compared with other European markets, the UK’s property market is relatively unattractive as yields have dropped during the past year or so. Hot global markets include Los Angeles retail property, Sydney offices and Antwerp industrial sites, the Times reports.

We’re not short at the moment of gloomy commentary on the outlook for UK commercial property – as well as the quarterly index from Jones Lang LaSalle showing a slowdown in returns and capital values, and the Savills development activity expectations index turning negative, we also have the latest CB Richard Ellis monthly index, which shows again that returns and capital growth slipped last month. One common theme among reports such as these is the sharp difference between the market in London – particularly for central London offices and prime retail positions – and the rest of the UK.

CBRE’s Monthly Index for July recorded total returns for all property of 0.9%, down from 1.1% in June, and capital growth of just 0.4%. Nearly all sectors of the market experienced a slowdown, CBRE says, except for central London offices. This segment boosted the overall returns for the offices sector to 1.2% with capital growth of 0.7%. Returns for retail were just 0.7% with capital values up 0.3%, while industrials bucked the trend with a small improvement on June’s figures – returns rose 0.8% and capital growth was 0.2%. Industrials are still, however, the weakest sector on a year-to-date basis.

Cushman & Wakefield’s recently published Marketbeat report also comments on the clear polarisation within the retail sector between the market for central London retail space, which has continued to report strong rental growth, and much of the rest of the UK, particularly parts of the north of England and the Midlands, where rents are still softening. In the offices market, while the strong recovery in central London has continued, with rents rising in the City and West End, the recovery has been patchy elsewhere – East Anglia, Scotland and the South West recorded some growth during Q2 but office rents were generally unchanged elsewhere, the group noted.

The outlook for commercial development activity has turned negative for the first time in 12 months, according to Savills, which has published its latest Commercial Development Activity report. The lack of funding for new projects and worries about the outlook for public-sector demand were cited by those surveyed as reasons for their negative viewpoint.

Savills says that the index measuring expectations of activity over the next three months dropped to minus 1.2% in July, down from +5.3% in June, thus recording the first negative result since July 2009. Of the three main sectors monitored, developers were most pessimistic about office activity, followed by retail & leisure, Savills says. On balance the firms surveyed expected growth in industrial/warehouse activity.

Savills says that while the pace of commercial property development activity rose in July, the increase was only marginal and followed a modest reduction in June. Growth was driven by private-sector demand, as public-sector development continued to fall sharply. The Total Commercial Development Activity Index – the net balance monitoring the overall performance of the UK commercial property sector – came in at +0.6% in July, up from minus 2.8% in June. The latest net balance was much lower than the long-term survey average of +5.3%.

More evidence has emerged of a slowdown in UK commercial property, as Jones Lang LaSalle says its Quarterly Index recorded a fall in all-property total returns to 3.6% for the second quarter, from 6.2% in the first quarter.

Capital values grew 2.0%, also slower than in the first quarter, as the pace of yield compression continued to diminish, JLL noted. The group said the retail sector recorded the strongest returns in Q2, at 4.1%, reflecting capital value growth of 2.5%. Returns for the office sector were 3.8% and for the industrial sector 2.0%.

Average rental growth for all property continued to slip, coming in at minus 0.1% in Q2, but this hides the differences between sectors – offices continued to record growth in rents, up 0.1%, while industrial rents fell 0.4% and retail rents dipped 0.2%. The stronger office sector figure reflects the “considerable improvement” in rents for City and West End offices, the group pointed out.

Mike Penlington, director in JLL’s valuation advisory team, said the group expected price discrimination to remain substantial, as the weight of money that had fuelled investor demand at the start of the year tailed off. He added that investors would try to identify opportunities “in a market where rents and values for assets in weaker locations will remain under downward pressure.”