NovaLoca Blog

Cushman & Wakefield says London remains a key city in which to do business – investment activity in the capital’s commercial property market remained at a high level during the second quarter of 2010, with £2.78bn transacted in the key City, Docklands and West End markets.

“To date this year, £4.45bn worth of property deals in central London have taken place – more than double that for the same period last year (£2.11bn),” C&W noted. The London market remains attractive to overseas investors thanks to the many current predictions of rental growth, and sterling’s weakness against the dollar.

Middle Eastern and Asian investors have been particularly active, C&W says, noting that the sale of the Knightsbridge estate to Saudi Arabia’s Olayan Group for around £600m accounted for almost a third of West End investment in Q2. Total transactions in this part of London were £1.68bn for the quarter, up 95% year-on-year. Only last week Mitsubishi Estate Company sold Bow Bells House in the City for £140m to an overseas private investor in order to unlock funds for a new development drive in the capital.

In the City and Docklands markets, £1.1bn of property was transacted during the quarter, up from £0.56bn in Q1 and 57% higher year-on-year. “There is also some £1.1bn worth under offer which is expected to complete in Q3,” the group noted.

Bill Tyser, head of City investment at Cushman & Wakefield, said there had been expectations that a combination of election uncertainty, the Greek economic crisis and the UK’s Emergency Budget would lead to a stalling of investor interest. “This has not happened and we are seeing a high level of activity,” he confirmed.

More commentary in the mainstream press today about the recovery in the UK’s commercial property market, particularly in the City, and how it may already be running out of steam. The Guardian cites a report out today from NB Real Estate saying that average rents for price office space in the City of London jumped to £53 per sq ft in the second quarter of 2010, from £47.50 a year ago. Rents have risen by nearly 12% in the first and second quarters.

The newspaper quotes James Gillett, director of City Offices at NB Real Estate, as saying: “Two successive quarters of such strong rental growth is without precedent.”

“Often the harder a market falls, the stronger it bounces back. Rents fell off a cliff post Lehman Brothers. We are now seeing them rebound strongly as demand from occupiers recovers and the supply of prime office space dries up.”

But the latest monthly index from CBRE indicates that the property investment market is slowing, the Guardian points out, while IPD data show that the growth in property values seems to be losing momentum.

James Young, head of Cushman & Wakefield’s City office, says the second quarter has been quieter than the first. He notes that growth in rents is being driven by a lack of supply rather than a big jump in demand. Young expects City rents to rise to £60-plus per sq ft in the next two years, and says they could even go beyond the pre-crisis levels of £65 per sq ft, the paper adds.

Available office space in Central London fell to its lowest level for two years in June, says CB Richard Ellis. The group’s monthly overview of the Central London office market reports that availability fell by 0.5m sq ft in June to 15.8m sq ft, which represents an availability rate of 7.2%. Both new and second-hand space saw declines in availability.

In the West End, availability fell nearly 0.4m sq ft to 5.9m sq ft, while available City office space dipped 0.2m sq ft to 6.1m sq ft.

“The tightening of supply is the key trend to emerge over the last year,” CBRE noted. It says that availability, rather than demand, will be the key driver of rental growth over the next year.

Central London offices take-up picked up strongly in June at 1.4m sq ft, but the rate for the quarter was still below average at 2.7m sq ft. However, CBRE points out that the dip in Q2 demand is from a near-record level – take-up for the year to date is more than three-quarters of 2009’s level. And this, together with the fall in supply, sets up the conditions for a recovery in rents during the second half of 2010.

CBRE this week also published its Monthly Index, showing that the investment market is slowing as yields flatten. Outside London, occupier markets remain fragile, the group says. The All Property total return for June dipped to 1.1% from 1.2% in May, with capital growth slowing marginally to 0.6%. While offices outperformed with total returns of 1.3% and retail showed some resilience at 1.1%, the industrial sector produced a total return of 0.6% and no capital growth.  

NovaLoca wishes good luck to all those taking part in today’s King Sturge Triathlon at Eton’s Dorney Lake. At least the sun is shining!

The Telegraph reports today that law firm McDermott Will & Emery has signed up to become the first tenant of the Heron Tower in London, paying the highest rent per sq ft since the onset of the economic downturn in the UK.

The firm has agreed to take 25,000 sq ft over the eighth and ninth floors and will pay around £55 per sq ft, the paper says. It quotes Knight Frank as saying rents for available office space in the City rose from £46.50 per sq ft to £50 per sq ft in the second quarter of 2010.

The Heron Tower is still under construction and is due to open next year. The distinctive building, located at 110 Bishopsgate, will contain 440,000 sq ft of office space and a public restaurant at the top of the building.

Remember back in April we blogged about the Carbon Reduction Commitment (CRC Energy Efficiency Scheme), the thorny issue of the position between landlords and tenants, and how the results of the British Property Federation’s working party on the subject were eagerly awaited? Well, they’re in. But they don’t show any consensus on the key issues – even the landlords that participated can’t agree among themselves. So a standard CRC lease clause is some way off.

The BPF says the majority of respondents from across the property industry believed that tenants in buildings belonging to landlord participants should contribute in some way towards the cost of CRC participation, but “opinions varied as to how far they should do so”. There was no agreement on whether administrative costs should be borne by the landlord as a “head office cost”, since the CRC imposes obligations on the landlord’s corporate group.

There were concerns, among the minority who believed tenants should not contribute at all to the landlord’s costs in participating in the CRC, that to do so would have negative effects on the liquidity of the property market. This could distort rents, as tenants might not be willing to furnish market rents for leases that contained extra obligations arising from the landlord’s participation in the CRC. There were also clear differences of opinion about alternative ways to meet the costs of CRC participation, such as higher rents per sq ft.

Most respondents did agree, however, that the costs and benefits of the scheme to individual buildings and tenants should be determined by reference to actual energy use. And if the costs are not passed on to tenants, respondents agreed that the volatility of energy prices and corporate social responsibility issues would be incentives for landlords and tenants to work together on energy efficiency – carbon emissions reduction after all is the aim of the scheme.

The BPF has concluded that “it seems, therefore, inevitable that one single, industry-standard, CRC lease clause is unachievable in the short term,” but still sees merit in highlighting particular approaches that landlords may decide to follow. Its Industry Working Party is thus working on a second edition of “The Carbon Reduction Commitment: A Guide for Landlords and Tenants”, and this is expected to be issued later this month.

CB Richard Ellis has poached Neville Moss from Jones Lang LaSalle to become its new head of retail research for the Europe, Middle East and Africa (EMEA) region.

Moss formerly held the same role at JLL. CBRE says he has more than 20 years’ experience in research and consultancy for retailers and retail property companies.

Nick Axford, senior managing director of global research at CBRE, said: “We are delighted to have attracted such a high-calibre retail specialist.”

“Neville is highly regarded within the retail property sector and will undoubtedly make a substantial contribution to CB Richard Ellis,” he added.

The best time in two generations to invest in investment-grade Central London commercial property? That’s what the managers of the new Rudolf Wolff Central London Commercial Property fund think, according to Investment Week.

The new fund aims to produce net annual income of between 5% and 7% and total returns of 15%-20%, investing in London properties with strong anchor tenants. The target maturity of the portfolio is 5-7 years.

The fund is being run by  Robert Hacking-Brian, Ian Besley and Anthony Farrant, previously of Dawnay Day. They say Rudolf Wolff has deliberately waited until after the recent Budget to launch – they are confident that “recession-proof” commercial properties in Central London will continue to attract foreign investors, safeguarding stability.

“During 2008 and 2009 the Central London market was oversold in anticipation of the high vacancy rates seen in the 1990s recession,” Farrant said. “This overhang has not happened as there were far fewer speculative developments underway at the top of the market. This means we are beginning to see a sharp rebound in both rental and capital values, and seek to capitalise on this trend.”

While fund managers’ confidence has been shaken in recent months by the economic downturn, major businesses still appear optimistic – particularly regarding their own prospects. These are among the findings of the latest quarterly Lloyds Banking Group’s Commercial Property Confidence Monitor.

The survey, conducted during May, came ahead of last month’s Emergency Budget and took place during the worst of the worries about the Greek economic crisis. This is bound to have had some effect on the results and perhaps explains the reduced confidence among fund managers compared with the other property professionals surveyed.

Brian Darling, real estate director at Lloyds Banking Group, said: “The market has reacted well to a period of uncertainty. Although confidence has taken a hit, property professionals remain largely optimistic about the second half of the year.”

With regard to property values, businesses are still on balance expecting increases in the next three months, but principals at medium/large businesses and fund managers have both slightly reduced their net positive position. Looking at sectors, most groups surveyed said they expected housebuilding to show the best performance during the next 3-6 months, although fund managers expect offices to be the major success area.

Moorfield and Hines have today confirmed their £200m purchase of eight buildings on the Brindleyplace estate, as rumoured earlier in the week. For more details, see Property Week.

Last week’s upbeat comments from Scottish Widows Investment Partnership regarding the prospects for commercial property have been challenged by Jason Butler from Bloomsbury Financial Planning.

Butler says in an interview with FT Adviser that SWIP’s prediction of total returns of 8.5% per year until 2015 is “overly optimistic”, and does not take the consequences of the recent Budget into account. He added: “With such a volatile backdrop I do not know how the commercial property market is going to thrive. I think investors should keep their exposure to property the same as it was three years ago and not increase it.”

At Citywire James Smith is highlighting the split in opinion among property professionals as to the outlook for the commercial property market in general, with those who like the yields to be had from property investment pitted against those who are worried about the sector’s debt burden.

If you are feeling charitable while you ponder property’s prospects, why not take a look at the latest event from King Sturge in its charitable efforts to celebrate its 250th year. Pianist (and principal property auctioneer) Felix Rigg has recorded a CD of classical music (which can also be downloaded as an MP3) to raise funds for the male cancer charity Orchid.