NovaLoca Blog

Launching its 2013 Money into Property report, DTZ says UK invested stock fell by another 3% last year, to £541bn, taking the total decline since the 2007 peak to 7%. But despite the decline, the firm’s analysis shows “mounting evidence of a recovery in UK real estate”.

This deleveraging was again led by the reduction in debt held against property; but while bank lending has declined, non-bank lending has stepped up as insurers, funds and bond issues move into to plug the gap. Non-bank lending was still only 8% of total private debt last year but it has been rising quickly: DTZ says it grew by 35% in 2012 after a 17% expansion in 2011. Nigel Almond, head of strategy research at DTZ and co-author of the report, says a more diverse funding base will decrease the reliance on traditional bank funding “and hence improve the resilience of the market in the face of cyclical swings in future”.

Although investors and lenders remain wary, they expect more supportive funding conditions looking ahead, DTZ says, and 61% of lenders in the report say they have made substantial progress in their workout of non-prime loans. More than 75% of investors say that finding access to new acquisition finance is not an issue – compared with 61% a year earlier; and refinancing existing debt is not considered a major problem, with 70% of respondents saying they have no difficulty in accessing debt.

Investment volumes were up 6% in 2012 to £32bn following the previous year’s decline. Activity focused on the highly liquid London markets, with foreign investor activity up 61% lst year. DTZ’s latest Fair Value analysis indicates that the UK market now provides the best relative value across UK property in 11 years and is out-performing the broader European markets. Ben Burston, head of UK research at DTZ, notes: “London offers large lot sizes and liquidity. It is also benefiting from a relatively resilient occupier market”.

Writing in the latest issue of “In Retail”, CBRE’s head of retail agency Tony Devlin says that while retail administrations might be expected to trigger frantic cherry-picking by retailers previously locked out of prime pitches, this is not happening. Difficult-to-shift legacy holdings are obstructing wider retailer movement in stock.

When good retail stock is released, he notes, it generates demand from new entrants and from existing occupiers who need additional units or who want to trade up in terms of size or location. New market entrants have a clear advantage over existing occupiers when it comes to this newly available retail property, he points out, as they don’t have an existing shop to get rid of in order to move to the new unit, and can make an instant decision. Existing occupiers have to decide whether it is cost-effective or even feasible to move, depending on such factors as the remaining lease term and whether a replacement occupier can be found for the vacated unit.

The number of potential new entrants in large town centres is usually far smaller than the number of existing retailers that want to expand or upgrade their holdings. Meanwhile, the number of expanding retailers is quite small at present, and many of them are already represented in the larger centres, which reduces the demand for stock released in these markets. And the existing occupiers that want to upgrade are often encumbered with retail premises to let of a character or lease conditions that make them difficult to re-let, he adds.

“So, in recessionary times like these, releasing a really great unit in a top trading location does not necessarily mean that there will be a long queue of retailers vying with each other to occupy it,” he points out. “It all depends on the existing occupier mix, and who is represented.”

The administration mechanism favours those who can act quickly, and thus excludes “many retailers that might otherwise, given the time to sort things out, consider acquiring units offered.” As a result, bargain-basement prices can be paid at administration for exceptional units, he notes. And the mix of a high street can be damaged “by the introduction of inappropriate occupiers that would otherwise not get in”, he adds.

A portfolio such as that of HMV, with well located and configured retail space in top trading locations, can be difficult to shift because of the legacy properties that occupiers have to offload before taking on another unit. By contrast, a secondary-located network such as Blockbuster can be fought over as it fits the profile of key convenience and service players such as grocery chains and pound shops.

While highlighting this problem does not necessarily mean that there is a solution, CBRE does point out that while mix damage has been done in some high streets, the steady trickle of retail administrations “has ended the generation-long High Street logjam” and in many others has breathed life, through new entrants, into “previously moribund” pitches.

RICS says 10% more surveyors across the UK reported rising workloads in the first quarter of 2013 – a higher percentage than at any time since the end of 2007. The latest RICS UK Construction Market Survey showed an increase in private housing construction activity, perhaps lifted by some of the government’s initiatives to revive the sector.

There were large variations from region to region, with London, the South East and the Midlands reporting increases in construction, but Northern Ireland and Scotland seeing a continued fall in workloads. “The sector in these parts of the UK remains particularly depressed,” RICS says, “and the picture shows no immediate signs of improving”.

However, overall a net balance of 27% of surveyors expect workloads to rise in the next year, continuing the current more positive trend. “It would appear, that at long last, a little bit of confidence is gradually returning to the industry,” RICS says.

It’s far too early to start to talk about a recovery in the construction sector, says RICS chief economist Simon Rubinsohn, cautioning that there are still “significant challenges” to be overcome – not least the lack of available finance, and planning-related issues.

Jones Lang LaSalle says Q1 2013 take-up of office space in the Western Corridor, at almost 650,000 sq ft, was nearly four times the level of a year earlier, and a third above the five-year quarterly average of 487,500 sq ft. The total figure was driven by activity in West London office space, where take-up reached 408,000 sq ft in the first quarter.

BP took 135,000 sq ft at Building 2, Bedfont Lakes, which significantly boosted the total. JLL’s James Finnis, head of South East Office Agency at Jones Lang LaSalle, says the deal marks a “sea change”, with a major corporate taking a pre-let rather than re-gearing in existing space. “We are forecasting take-up in excess of 2.25m sq ft for 2013, with deals being driven by the pressing issue of obsolescence backed up by the hard deadline of The Energy Act,” he adds.

“There will be further pre-lets in 2013, which will help to drive rents forward, as investors/developers with new schemes will not be prepared to take the development risk unless they are seeing an adequate return,” he points out.

Take-up of Thames Valley offices rose 17% q/q to a total of 234,700 sq ft. The biggest transaction in this market was TAG at Farnborough Business Park (37,800 sq ft), JLL notes. Current supply in the Western Corridor is around 5% lower q/q and y/y, with the largest fall recorded in the Thames Valley. Grade A vacancy rates are currently 2.4% in West London, 7.7% in the Thames Valley, and 5.0% in the Western Corridor.

Average rents rose 4.8% y/y across the Western Corridor, with rents in the Thames Valley stable q/q and y/y while in West London rents were up 1.3% q/q and 8.7% higher y/y.

JLL says there is 2.4m sq ft of active named demand in the Western Corridor, which the firm says “is on a par with this time last year, and provides a solid base for the market going forward”. 

New research from Jones Lang LaSalle shows a jump in office requirements for Edinburgh, with the number of businesses seeking office space in Edinburgh nearly trebling in Q1 2013 compared with the previous quarter.

In total there were 62 new Edinburgh office requirements during Q1, compared with 25 in Q4 2012, says JLL. “With deals normally taking between six and 12 months to complete, take-up during the second half of 2013 is predicted to reinforce improving market conditions for the city,” the firm adds.

Occupier take-up in Q1 2013 reached 158,000 sq ft across 40 deals, which was 19% above the 133,205 sq ft transacted in the previous quarter. JLL points out that West Edinburgh offices take-up accounts for nearly 30% of the total figure so far this year. Edinburgh city centre offices take-up accounted for just over half of the total.

Ben Reed, director of office agency at Jones Lang LaSalle, says West Edinburgh has been “standing still” as an office destination for some years, but there are now signs of new life in the market. “Edinburgh Park, in particular, is experiencing a significant increase in interest, having only transacted a total of 7,000 sq ft during 2012,” he adds.

He says that offices around South Gyle are becoming increasingly attractive to occupiers seeking good value, with rents at around £10-£15.50 per sq ft compared with £27 per sq ft in the city centre. “This location in particular is very well connected via public transport, including two new tram halts located on Edinburgh Park. Accessibility is an increasingly important factor when selecting new premises as more staff are using alternative forms of transport.”

Analysis of 32 regional UK property markets by Lambert Smith Hampton has found that 27% of total regional available office property (11.7m sq ft) is obsolete and that of this total, 7.4m sq ft is suitable for conversion.

“This obsolete space is acting as a drag on the market, by artificially inflating the availability figures and discouraging new development in locations which have high levels of secondary and tertiary availability, but low levels of the type of office space that occupiers are increasingly targeting,” LSH says.

Following the government’s recent announcement that they will allow office space to be converted without planning permission, “the conversion route is an obvious step for any investor or developer,” says Tony Fisher, national head of office agency at Lambert Smith Hampton.

If 7.4m sq ft of office space were converted it could provide 11,500 new homes, LSH says; it has ranked the top centres, considering the amount of buildings in the right locations, with suitable layouts and residential demand. These are Birmingham, where 2.4m sq ft of the city’s stock of office space has the potential to be converted; Edinburgh, where 800,000 sq ft of space actually on the market could be converted; Nottingham (400,000 sq ft); and Slough (340,000 sq ft).

Tony Fisher explains that the reason for the high amount of obsolete office stock is that, given the changes in modern workplace requirements, “any stock that does not meet modern workplace trends is unlikely to ever be let again”. Modern occupiers need flexible, open-plan space and – crucially – less of it, he notes. These changes have coincided with a downturn in the market since the 2007-2008 peak. “A medium-sized office market like Nottingham has almost a million sq ft of available grade C space, for which there is very little market. Much of it will never be let again,” the firm says.

Although planning authorities in Central London have not been receptive to the conversion process because of their desire to protect small businesses and maintain the infrastructure of London’s office-based economy, LSH says, there has already been a quickening of the pace of office conversions in regional markets since the top of the market in 2007-2008.

Since Scottish Enterprise switched in November 2012 to NovaLoca from CoStar as a source of current availability of properties in Scotland, the number of views has been rising steadily and enquiries have also increased.

To make the Scottish property data available to Scottish Enterprise and to increase the incentive for agents to keep it up to date, NovaLoca made the basic details of all properties available to occupiers without registration, with agents able to add information free of charge.

* April 13 figures based on actual figures from 1st to 23rd April, plus prediction of 24th to 31st based on rates for the rest of April

Miranda Munn, managing director of NovaLoca, says: “We now have over 5,000 Scottish properties listed on NovaLoca and in addition to the enquiries generated by Scottish Enterprise have so far produced almost 5,000 enquiries for Scottish agents, with properties being viewed over 600,000 times.”

Total returns from UK commercial property in March reached 0.5% at the All Property level, according to the latest CBRE monthly index, taking the total for the first quarter to 1.2%. This follows a 0.4% return in February. Capital values continued to fall, dropping 0.1% for All Property, resulting in a decline of 0.4% for the first quarter of 2013.

CBRE says capital values declined in all major sectors of the market, apart from Central London offices, where they rose 0.5% thanks to a particularly strong performance by West End offices and City office space. After smaller capital value growth of 0.1% in February, West End office space reported 0.8% growth in March, with total returns for March rising 1.1% after gaining 0.5% in February. In the City offices recorded an increase of 0.1% in capital values and total returns of 0.5%. At the All Offices level, the sector recorded capital growth of -0.1% and total returns of 0.4%.

The decline in capital values within the retail sector slowed at the All Retail level in March to a fall of 0.1%, while total returns increased to 0.5% from a 0.4% gain in February. Total returns for industrial property in March were 0.6%, driven by income rather than capital value growth.

Rental values remained flat overall for the third month in a row, with Central London offices the only sector to record an increase in rents. West End offices produced rental growth of 0.5%, City offices 0.3% and Midtown offices 0.1%.

Aleksandra Starczynska, analyst at CBRE Research, says the monthly index has continued to reflect the sentiment of the UK investment market. “Almost one third of investments (28.7%) in Q1 2013 across the UK were made in Central London offices,” she points out. Total activity across the rest of the country is starting to increase, she adds. “Simultaneously, we are starting to witness a shift in the buyer profile in the UK with domestic investors becoming far more active in Q1, making up 58% of buyers.”

Miranda Munn, managing director of NovaLoca.com, writes:

“I had a great time at the Property Awards on Wednesday entertained by the most excellent Bill Bailey. On a packed table hosted by Property Week (the lovely Grant Elrick & Penel Tait taking care of us) I sat with Steve Carrick from Savills on one side (delighted to have sponsored your award) and Matthew Allen from BNP Paribas on the other (a last-minute addition, apparently, judging by the hand-written name card). Others included Sally Saadeh of DTZ (or is it Saahe?), Jennie Sandvold of Deloitte (what do you mean you are leaving us?!), Ian Brindley of Hempel (I knew I’d worked with you in a previous life) and Neil Warwick of Kinney Green (the most excellent dancer).

After the awards were over I spent most of the time on the dance floor; paid for with blisters & aching limbs the following day – and a bruise on my knee where I may have fallen over while dancing (I blame the shoes – gorgeous but totally impractical).   

If you missed out you can catch the highlights at     http://www.awards.propertyweek.co.uk/ – scroll down to the third video from the bottom & watch the best & most important bit where the delighted David Bell from Savills receives the award for Leisure Agency Team of the Year.” (picture: Oliver Knight – www.oliver-knight.com)

At this year’s awards, Battersea Power Station’s £400m sale was named Deal of the Year, and the Kings Cross Central redevelopment won the Regeneration Award while its developer Argent was named Developer of the Year.

Hammerson was named Property Company of the Year; Legal & General Property was Fund Manager of the Year; and Jones Lang LaSalle picked up a total of three awards, for Office Agency Team of the Year, Industrial Agency Team of the Year, and Investment Agency Team of the Year. As mentioned above, Savills was named Leisure Agency of the Year; Colliers International’s rating team won the award for Professional Agency Team of the Year; and Cushman & Wakefield was named Retail Agency Team of the Year.

Raymond Mould was named Property Personality of the Year, following his retirement in 2012 after more than 40 years in the industry. The award for Young Property Personality of the Year went to Jason Kow at Queensgate, while Jamie Ritblat was named Property Entrepreneur of the Year. Property Newcomer of the Year was Crosstree Real Estate.

Prologis won the award for Global Real Estate Achievement of the Year, while the Co-operative Group was named Occupier of the Year. The Sustainability Achievement award went to British Land.

Rents for prime office space in key towns in the southern M25 area are likely to rise as a result of a lack of good-quality stock, says Hurst Warne. Will Gelder, in the firm’s Redhill office, says the economic downturn in 2007 put a stop to almost all new commercial property construction in the area and points out that, with developers struggling to secure new financing during the recession, there is a lack of developments coming through in the pipeline.

Headline rents in nearly all southern M25 towns have fallen since 2007, he adds, after approaching £30 per sq ft before the recession in key towns. There has been gradual take-up of the better-quality available office space as Grade A offices have become more affordable, which means that the supply of Grade A offices in Redhill, Reigate offices and Leatherhead offices is dwindling.

A rise in rents for better quality space in these towns is thus “almost inevitable” in the next 12 to 24 months, the firm says. Hurst Warne notes that two recent deals – at The Heights Business Park in Brooklands and Kia Motors at Walton Green (both £28.50 sq ft) – confirm that “demand for prime space is already pushing rents up”.