NovaLoca Blog

Stuff we like for free – the British Retail Consortium has today launched a free booklet to help retail occupiers to cut costs by engaging actively with their landlords.

The Property Management Checklist outlines simple steps that the BRC says every retailer should take in order to make sure they are getting value for money for the property services that they pay for. The list includes advice on rent, service charges and energy use.

Among the things the BRC recommends that retailers do is to ask the landlord for monthly rents when the lease comes up for renewal or at the rent review; to ensure that service charges are compliant with the Service Charge Code of Practice; and to encourage landlords to use meters to monitor energy use separately for each shop.

Elizabeth Hinde, head of property at the BRC, said: “Property bills can account for up to 40% of retailers’ costs. But for many small retailers this figure could be even higher with property being their biggest expense.”

“In these tough times, it’s essential for retailers and their landlords to make savings where possible – otherwise the spectre of boarded-up shops will continue to blight our high streets.”

Mark Twain once said: “history won’t repeat itself, but it may rhyme”. Invista Real Estate Investment Management believes this saying illustrates what may happen next in the UK commercial property market.

The recent strong recovery in UK commercial property resembles that of the early 1990s, the group says, when values jumped sharply, despite falling rents, only to slip back again the next year. After January 1994, quarterly annualised returns dived from 39% to 1% in just 18 months. While the group believes that something similar will occur in the next 12 months, it says there are sufficient differences in the underlying fundamentals to justify adopting Mr Twain’s quote. 

While UK commercial property market returns are set to ease over the next 12 months, Invista believes that we are unlikely to see as dramatic a slowdown as we did in the mid-1990s. The historically high margin between property and government bond yields should protect investment performance in the short to medium term, it says.

Despite the likely positive effect of a subdued development pipeline, few investors are expecting a speedy recovery in the occupier market this time round because recent economic growth has been weak, Invista says.

We are likely to see a repeat of the mid-1990s rental picture, it believes, but the near-term outlook for the investment market looks a little more favourable. The group anticipates total returns of 7.5% over the 12 months to end-May 2011, “but the risk lies very much on the downside,” with the risk of sharp rises in government bond yields the most significant threat, it cautions.

Stock in the Midlands industrial and distribution market is drying up, according to CB Richard Ellis, after strong take-up rates in Q4 2009 and the first quarter of 2010.

Mike Stephens, valuation advisory director at CBRE’s Birmingham office, told an audience of local property developers at the firm’s Midlands Market Insight Seminar earlier this month that active enquiries from retail and logistics operators were “all looking for design and build solutions, which frankly is the way the market is going. There is no sign of speculative development on the horizon whatsoever.”

The Birmingham office market is also unlikely to see any speculative development, thanks to a surplus of Grade A space, developers were told. The scale of government cutbacks is also likely to have a significant effect on the local market, which has become overly reliant on the public sector – it accounted for 50% of office take-up in the city in 2009.

Stephens added: “Hopes are now pinned on the private sector taking up the city’s surplus of Grade A space. There will be a flight to prime space as corporates consolidate, but rents are unlikely to reach their £33 per sq ft peak until stock reduces. There are already signs, however, that the market is stabilising.”

Investment activity in Birmingham and the region is likely to pick up in the latter half of the year. Stephens predicts that UK institutions will be the most active players while German funds, who were the dominant purchasers last year with the acquisition of One Snowhill and 2 St Philips Place, are likely to scale back. Stephens thinks the UK investment buyers will focus on leases of more than 10 years, in lot sizes of £15m-£40m, and will target prime assets in traditional sectors.

Peter Damesick, CBRE’s head of UK research, said that after a volatile couple of years, the property market was starting to acclimatise to a ‘new normal’. He said he didn’t anticipate a double dip in the economy, though there would be a few “dips in the road”.

He added: “Things are starting to settle down and we are beginning to get a flavour of how the markets are shaping up. Value rebounds are fading; debt unwinding will take some time; there will be a greater differentiation between local markets and property assets; development opportunities will start to emerge as supply shortages increase; rental growth prospects are variable. This all adds up to a positive medium-term outlook for property returns. Welcome to the ‘new normal’.”

UK commercial development activity in June fell for following two months of growth, says Savills, with public-sector activity plummeting while private-sector development actually increased for the 11th month in a row.

The group notes that just under 22% of the commercial developers it surveyed reported a drop in activity overall during June, compared with 19% that indicated an increase. As a result, Savills’ Total Commercial Development Activity Index was -2.8% for June, compared with +4.1% in May. The net balance of the index during Q2 was +1.8%.

Expectations were also weaker in June, with the future expectations index at +5.3%, down from +8.6% in May. Savills cited anecdotal evidence that constraints on bank lending and worries about future public-sector demand had weighed on confidence.

By sector, developers were most upbeat about industrial / warehouse activity – and least confident about office development. Refurbishment was one of the fastest-growing areas of activity as measured by the survey.

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.

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.”