NovaLoca Blog

CB Richard Ellis says its latest Leeds Offices MarketView shows that the occupational market in the city remains fragile, but claims that higher activity levels indicate an improvement in occupier sentiment going into the second half of the year.

Take-up in the city centre was 143,800 sq ft during H1 2010, lower than the 229,800 sq ft taken up in the second half of 2009 and also lower than the 184,200 sq ft completed during H1 2009, the group says. Overall, £151m of investment deals completed, compared with £103m in the first half of 2009. CBRE says pent-up demand is set to reactivate larger requirements “towards the start of 2011”.

Jonathan Shires, director of office agency at CBRE in Leeds, notes that the first half of 2010 was characterised by a greater number of smaller deals, reflected in the lower take-up overall. A total of 48 deals have completed so far this year (36 in H1 2009) but 41 of these were less than 5,000 sq ft – the average deal size has fallen to 3,000 sq ft compared with 5,100 sq ft in 2009. “There has been an absence of any significant lettings and the completion of only two deals above 10,000 sq ft,” he added.

Availability in Leeds at the end of Q2 2010 was 1.7m sq ft, down 6% from the end of 2009, and reflecting a drop in secondhand space – new space on the market remained unchanged at about 650,000 sq ft. “With only 35,955 sq ft under construction at 10 South Parade and no expected speculative construction, it is likely that the availability of Grade A stock will begin to trend downwards over the next months, supporting prime rental levels moving forwards,” Shires added.

Alex Whiting, senior director of investment for CBRE in Leeds, says the continued limited availability of debt finance means that future transactions depend on “the appetite of funds and cash buyers”. He expects the volume of transactions in the second half of 2010 to be much lower than that seen in the first half following a sharpening of yields so far this year.

British Land announced a major City offices deal this morning, finally reaching agreement on a transaction that has been the subject of speculation for several months. The property group, together with its joint venture partner Blackstone, has signed a deal with UBS for the development of a new 700,000 sq ft building on its Broadgate complex.

The new building, on the site of 4 and 6 Broadgate, will have an initial headline rent of £54.50 per sq ft, with annual RPI-linked increases with a weighed average lease length of 18.2 years. The agreement includes the deferral of breaks in existing UBS lease agreements on other Broadgate buildings. British Land says the deal, which is still subject to planning approval, increases the average lease length at Broadgate by up to 2.4 years.

Development costs are put at around £340m, excluding land and interest costs. The completion to shell and core is scheduled for the second half of 2014.

“The new building represents a significant commitment by UBS to the City and Broadgate in particular,” British Land said. “The development marks another important stage in the ongoing investment programme at Broadgate, which will ensure that it remains the premier City of London office estate, providing modern world-class accommodation for its office, retail and leisure occupiers,” it added.

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.”

To “kick-start a sustainable transformation of the North West of England”, the Evergreen consortium has been selected by the European Investment Bank to set up a major regional regeneration fund, in a move combining public and private funding that could total £350m for projects in Greater Manchester and the wider North West region.

Evergreen is led by Manchester City Council, CB Richard Ellis, and the Association of Greater Manchester Authorities (AGMA) and is supported by local authorities in Cheshire, Cumbria and Lancashire. Work is now underway to make the fund operational from early 2011.

The fund will start off with £20m of public money from Europe plus a further £10m from the North West Regional Development Agency. “This will unlock a further £30m of public-sector match funding and could see a total fund in excess of £300m – including investment from both the Greater Manchester and Lancashire Pension Funds – levered into regeneration projects in the North West over the next 10 years,” said CBRE.

The fund will provide loan finance to projects on strategic sites in the region that “will make a significant contribution to the success of the North West’s economy and create jobs.” Money from these projects will be recycled back into the fund to support further projects. In future it is hoped that the scope of the fund will expand to include financing for major low-carbon, housing and transport projects, CBRE noted.

Sarah Whitney, head of Government and Infrastructure at CBRE, said: "The Evergreen Fund will be a highly innovative fund, combining a small amount of public sector funding with substantial private sector investment, and delivering a series of strategic regeneration and development projects across Greater Manchester, Cumbria, Cheshire and Lancashire.”

“The consortium’s proposals are the result of a uniquely collaborative approach which has meant that more than 40 expressions of support were received prior to the submission of the proposals to the EIB, from local authorities, developers and other public-sector bodies, many of which will be beneficiaries of the funding that Evergreen secures. This level of support, which is unparalleled in any other form of local authority investment vehicle, should ensure that the Fund has the best possible start in life.”

The level of demand for office space in the UK has weakened following a promising start to the year, says King Sturge.

In its UK Office Occupier Enquiries Analysis for Q2 2010 King Sturge’s UK network reports that the number of enquiries for significant properties (over 20,000 sq ft in the City, West End and South East, and over 10,000 sq ft elsewhere) dropped 12% from the previous quarter, while the amount of floor space required by occupiers fell 14%.

“In the past, movement in enquiries has usually been reflected in take-up a few months later” according to Andrew Burrell, head of office research at King Sturge. “But since mid-2009, office take-up has recovered strongly ahead of any sign of an upturn in enquiries. The concern is that much of the recent rise in demand could be transient and may fade in the harsher post-election climate.”

Enquiries were up strongly year-on-year in the City and West End of London and the South East, while Nottingham, Newcastle, Glasgow and Edinburgh also showed improvement, as has Bristol more recently, King Sturge noted.

Derwent London, which specialises in central London property investment and regeneration, has agreed to buy Central Cross, 18-30 Tottenham Court Road and 1-2 Stephen Street, London W1 for £146m before costs.

The key West End office, retail and leisure property includes 216,000 sq ft of offices, 24,000 sq ft of ground floor retail space fronting onto Tottenham Court Road, and an 11,000 sq ft cinema.

Derwent says annual rental income is £8.1m from 21 leases to 10 tenants with an average rent of £34 per sq ft and an average lease length of six years. The net initial yield is 5.5%.  The group says 33% of the rental income is secured beyond 2020 while 38% is subject to lease expiries or breaks before December 2011. “Both the property’s office and retail elements offer significant opportunities for future refurbishment and improvement,” it said in a statement to the London Stock Exchange this morning.

The three principal tenants, who account for nearly 90% of the rental income, are media companies FremantleMedia Group, Ascent Media, and S Technologies, the owner of Skype. The deal involves the acquisition of the units in Merbrook Central Cross Property Unit Trust, a Jersey Property Unit Trust that holds the property. The acquisition will be financed from Derwent London’s existing bank facilities.

Derwent chief excecutive John Burns said the purchase “provides strong income at economic rental levels, together with opportunities for active management, future refurbishment and improvement of the office space which Derwent specialises in.”

“We will also be looking to enhance the retail units fronting Tottenham Court Road, which will benefit substantially from nearby infrastructure improvements including Crossrail. This transaction increases our holdings in the north of Oxford Street and Fitzrovia areas of W1 where we will now own 1.5m sq ft,” he added. 

DTZ’s second-quarter reports on the market for office space in the UK regions show that occupier sentiment clearly took a turn for the worse in many cases, and tenants were hesitating to commit to deals. While 2009 probably marked the lowest point for occupier sentiment overall, it still remains fragile.

Apart from the Leeds offices market, where the public sector has a number of large and credible requirements, public-sector demand has been limited following the cuts announced in the Budget.

Take-up is due to reach bottom in 2011 overall and to remain subdued over the medium term across UK regional markets. Transactions in Q2 fell back in all markets, apart from Glasgow, where several longstanding Grade A requirements in the city centre completed during the quarter – this performance is not expected to be repeated in Q3.

The divergence between Grade A space and secondary buildings is set to continue, DTZ believes. During Q2 the availability of Grade A space fell back, maintaining prime rent levels, as tenants took advantage of the current market to upgrade to better-quality space, while the overall availability of office space edged upwards. In Manchester, where there were several releases of Grade B space onto the market, Grade B availability actually jumped 40% in Q2. But the almost complete absence of a development pipeline and continued upgrading by tenants to better-quality and more efficient space means that Grade A supply will come down quite quickly, DTZ says.

Landlords are expected to begin cutting the level of prime incentives in some locations at the end of 2010. In Manchester, the reduced availability of well-located Grade A space has led some landlords already to consider cutting incentives. Headline rents are expected to be maintained in 2010 for almost all regional markets at broadly the same levels as those seen in Q2, and for some this flat trend is set to continue into 2011.

Miller Birch Developments has agreed a deal with E.on for a new 105,000 sq ft office building in Nottingham – a transaction viewed by many as the key deal of the year in the market for office space in the city.

King Sturge says its Nottingham office, acting for Miller Birch, has successfully brokered a pre-let to E.on for the design-and-build scheme. King Sturge partner Matthew Smith says this is one of the largest office lettings ever to take place in Nottingham and it has set a record rent level.

Earlier this month DTZ said E.on’s expected move to a site on Burton Street would be the highlight of the year for the market for office space in Nottingham. The site is currently occupied by the city council’s treasury – but not for much longer. The treasury staff are to move out at the end of August to the council’s new Loxley House headquarters.

The new nine-story office building will be the first in the city centre to achieve a BREEAM Excellent rating, using the latest technology to cut carbon emissions. It is due to be completed in April 2012 and will become the energy group’s national contact centre for its retail business, housing 800 staff.

DTZ in its Q2 2010 commentary on the Nottingham office market said that there had been a significant rise in Grade A take-up during the second quarter, with space mostly taken up by smaller, local companies. It said occupiers on the whole had remained cautious. Average prime headline rent for Nottingham in Q2 was £17.50 per sq ft, DTZ said, adding that it expected this figure to remain steady, while some secondary rents had dropped sharply and were now nearer £10 per sq ft.

It’s Friday! Time for a bit of gloom. Today brought to you by RICS, which says demand from tenants for commercial property fell in the second quarter – the first decline in a year. This has of course boosted the rumblings of concern that the recovery in the UK commercial property market may already be running out of steam.

In total, 7% more chartered surveyors reported a fall than a rise in tenant demand during Q2, compared with a positive 6% reading for the RICS Commercial Market Survey for Q1. This is the first negative reading since Q1 2009, RICS points out.

RICS says demand for offices showed the sharpest drop in London during Q2 – contrast this with all the recent reports of rising rental rates thanks to a scarcity of available prime office space. In total, 38% more chartered surveyors told RICS that they had seen a fall than a rise in office demand, compared with a positive 32% reading in Q1. Those surveyed reported that uncertainty about the extent of cuts announced in the Budget had weighed on investment decisions.

Demand in retail and industrial markets all fell across most regions, although RICS says the north of England is bucking the trend, reporting continued strong demand for both retail and industrial property. (Contrast this with recent comments from CBRE).

More survey respondents reported a fall than a rise in enquiries, with the net balance falling to -10 from +7 in Q1. Consequently, confidence in the outlook for lettings has also fallen for first time since Q2 2009, with the balance at -7. Confidence towards future lettings of office and industrial property in London fell to -19 and – 31 respectively. While confidence towards retail lettings remained subdued overall, in Central and Greater London, surveyor confidence improved from -58 to –7, RICS noted.

The availability of space for occupation picked up, driven by increasing space in the North and Midlands regions. Available space increased at slower pace in the South, while it broadly stabilised across all sectors in London, the institute added.

Meanwhile the Telegraph has reported that banks are poised to offload around £50bn of property from their balance sheets while development finance for new buildings is still in short supply – and new regulatory controls are about to change the dynamics of the commercial property market by constraining speculation, it adds.