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…

Last year was characterised by many as an occupiers’ market, but the British Property Federation says a revolution in lease terms has been quietly underway for the past two decades – and its survey of leases during the past year underpins these findings.

The BPF/IPD Annual Lease Review for 2009/2010 – the 13th edition – analysed 91,000 tenancies and shows that average lease lengths were at their shortest ever this year, falling to just five years, from 5.9 years in 2008/09. Small businesses are increasingly signing shorter deals, the BPF says, with 81% of them on leases of five years or fewer – and therefore unlikely to face a rent review. Only 3% of small businesses are on leases of more than 10 years.

The review also shows that 2009/2010 was a significant year for rent-free periods and break clauses, amid the poor economic conditions. The BPF adds, however, that the trend towards shorter leases has been underway for more than 10 years now, “also illustrating significant long-term change in the commercial property market and our economy”.

Back in the early 1990s most leases were typically for 20 or 25 years and often contained upward-only rent reviews. By sector, lease lengths in 2009/2010 were on average 5.4 years for retail premises, 4.7 years for office space and 4.0 years for industrial property – all three have come down substantially over the past year.

Liz Peace, chief executive of the BPF, said: “For small businesses, shorter leases are probably a good thing, with the pace of business change so fast these days it makes little sense for most small and medium sized businesses (SMEs) to tie themselves into the obligations of a long lease. Shorter leases have undoubtedly meant fewer businesses found themselves in trouble during the recession and therefore were able to survive it.”

“It is also important, however, that the property market is delivering variety. Long leases still play a crucial part in the funding of development of commercial property, even more so at this time when access to loan finance is severely rationed. The income certainty that a long lease with an upward-only rent review provides is often what funds a major retail or office development, or regeneration scheme. Some larger businesses still want a long-term commitment to a building and if the lease is long they are likely to get a corker of a deal.”

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.

While concerns about the economic outlook, public-sector spending cuts and constrained consumer spending all have a part to play in the negative sentiment currently making the headlines, worries about the financing of property are also still having an impact.

The recent figures from the Bank of England show that bank lending to property in Q2 2010 dropped by £3.5bn after a slight improvement in the first quarter. Jones Lang LaSalle points out that this is the largest fall in a single quarter since the data series began in 1987. However, JLL says the statistics do not necessarily reflect banks’ reluctance to lend for property investment. “Bank debt is still available for property investors purchasing prime assets at sensible loan to value,” it comments. Instead, it says the figures show that banks are starting to deal with the problem loans on their balance sheets.

Barry Osilaja, director in JLL’s corporate finance team, said that if banks were indeed resolving their problems, in the medium to long term this would be positive news for UK real estate. However, in the short term, the market for lending was likely to remain restricted to prime assets, and overall net lending might continue to shrink, he added.

Cushman & Wakefield recently commented that while overall credit conditions have eased marginally, as shown by the Bank of England surveys, the flow of funds to business remains restricted. It has become slightly easier to obtain debt on commercial property, it says, with more lenders willing to lend as capital values have recovered and rents have stabilised. “Overall availability of affordable debt is however still less than the market needs and what is available is still focused on prime property, with lenders still very reluctant to finance more secondary investments where income security may be an issue,” the group notes. As a result, lending for 2010 looks set to remain muted, Cushman & Wakefield says.

There is a large amount of institutional money chasing investment deals, which has restricted the opportunities for banks to lend at reasonable levels, the group notes. In addition, much of the lending that has taken place this year has been for refinancing and restructuring.

In a recent commentary, the Telegraph noted: “The road ahead could be a slow one for those looking to invest, as banks are likely to take their time readjusting their balance sheets before being willing to back property schemes with loans. In the 1990s, according to figures from the Bank of England, it took from March 1991 to December 1997 for banks to reduce their exposure to property lending from its peak level to a low. This decade the corresponding peak was reached in July 2009. A return to boom times is obviously some way off,” the paper concludes.

Shaftesbury, the listed REIT, has provided an illustration of the buoyant trading conditions in London’s West End, where its investment and development strategy is focused.

In sharp contrast to the cautious statements recently made by other property companies, and the commentaries indicating tough markets elsewhere in the UK, Shaftesbury said in a statement to the London Stock Exchange yesterday: “Despite the challenges evident in the wider economy, we are confident that the underlying strengths of the locations in which we invest and our management strategy will continue to deliver sustained outperformance in income and capital values.” 

The group, which owns more than 500 shops, restaurants, cafes and bars in the West End, said it had continued to experience good demand, particularly for its larger shops, well-located restaurants and residential accommodation, as the West End continued to flourish despite the uncertain economic outlook for the UK as a whole.

Shaftesbury said that as of 31 July, 72% of the space in its joint-venture St Martin’s Courtyard development in Covent Garden was either let, pre-let or under offer, and it had seen “active interest” in the remaining single restaurant and eight shops still available. The marketing of the remaining office space in the development was running ahead of completion, it added.

As at 31 July, the group had no available retail space among the larger shops in its portfolio(rent over £100,000 pa) and a total of 23 smaller shops (average rent £45,000 pa) were ready to let or under offer.

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%.

Listed property group Hammerson says the outlook remains uncertain. As the group today unveiled a 7% increase in adjusted pre-tax profit during the first half of 2010, chairman John Nelson said: “With an uncertain economic outlook we will focus on the performance of our assets, increasing income and controlling costs.”

“We will continue to improve the portfolio, looking for opportunities to recycle capital into assets with better growth prospects. We are actively advancing our valuable development pipeline, which offers the potential for superior growth,” he added.

Hammerson said it had made good progress on lettings during Q2 in particular, which had helped it to reduce vacancy levels. Occupancy stood at 96% as of 30 June, compared with 95% at the end of 2009. Overall net rental income fell as a result of property disposals during 2009, although this effect was more than offset by lower finance costs, new lettings and rent reviews. Like-for-like net rental income rose 5%.

The group said it had made excellent progress on its major shopping centre development in Marseille, where the main works are due to start early next year, and has been given planning permission for its 140,000 sq m mixed development at Bishops Place in London EC2. Outline consent has been granted for the mixed-use project at Watermark WestQuay and the retail-led Sevenstone development in Sheffield. A revised outline planning application for the retail-led regeneration of Leeds city centre (Eastgate Quarters) should be submitted by the year-end, the group added.

Lambert Smith Hampton’s quarterly research into the market for investment in UK commercial property shows that activity in Q2 2010 reached its highest for the past two years, with turnover of £8.3bn and 15 deals of more than £100m completing during the quarter.

Overseas investors were the most active during the quarter, accounting for nine of the 20 top positions in LSH’s most active buyers index. LSH chief executive officer Ezra Nahome said that the market had become more broadly based in recent months, with several sources of buying activity returning to the market. “The greater variation of buyers must bode well for the coming months, in what we believe will be a more challenging market.”

LSH expects the market to go through a period of consolidation now as it finds its new level. Transaction yields have fallen by an average of almost 150bp, with the retail warehouse and distribution sectors seeing adjustments of up to 250bp, and investors need time “to become comfortable with the new yield regime”, Nahome said.

Nahome added: “The austerity package instigated by the new government has made investors unsure about the prospects for the recovery in the economy.  The early signs from the equity market showed nervousness but property remains an attractive asset class and, with running yields of almost 6.5%, compares favourably with the return investors can achieve by investing their cash in the equity or bond markets.”

“The market may have come a long way in a short period of time but this has arguably been too much too soon and further improvement will be harder to achieve for the remainder of the year.”

Cushman & Wakefield has appointed Simon Hartley to its retail asset management team. Simon, who joins from GVA Grimley, will be working on a wide variety of shopping centres.

John Prestwich, head of retail asset management UK at Cushman & Wakefield, said: “We see huge potential for leveraging and developing our established retail asset management business across the UK and consolidating the firm’s leadership position within retail. Simon will strengthen our growing team and help ensure clients receive the best-in-class advice.”

Meanwhile CB Richard Ellis has recruited three new hires to its Property and Asset Management team. Richard Williams joins as an executive director from NB Real Estate (formerly Nelson Bakewell) where he was managing director of its Asset Services division. Williams has over 20 years’ experience at NB Real Estate. At CB Richard Ellis, he will be responsible for the surveying teams within the PAM division in London and the regions.

In Retail Property Management, Jane Wynne has been appointed as senior director to form a new specialist retail management team. Jane was formerly head of asset management at Quinlan Private, and head of retail asset management at Donaldsons (now DTZ).

In CBRE’s Birmingham office, the firm has appointed Greg Hunt as associate director. Latterly with Jones Lang LaSalle, Greg has also worked at Donaldsons and qualified with Slough Estates (now SEGRO). Hunt has worked on occupational and investor market transactions for funds and private individuals across multi-let offices, industrial estates, hotels and leisure schemes.

Andy Hay, managing director within CBRE’s Property and Asset Management team, said “I am very pleased that Richard, Jane and Greg have decided to join CBRE. Richard’s reputation as one of the leaders in his field precedes him and I believe that his experience and know-how will further add to our market-leading team.”