NovaLoca Blog

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%.

More evidence has emerged of a slowdown in UK commercial property, as Jones Lang LaSalle says its Quarterly Index recorded a fall in all-property total returns to 3.6% for the second quarter, from 6.2% in the first quarter.

Capital values grew 2.0%, also slower than in the first quarter, as the pace of yield compression continued to diminish, JLL noted. The group said the retail sector recorded the strongest returns in Q2, at 4.1%, reflecting capital value growth of 2.5%. Returns for the office sector were 3.8% and for the industrial sector 2.0%.

Average rental growth for all property continued to slip, coming in at minus 0.1% in Q2, but this hides the differences between sectors – offices continued to record growth in rents, up 0.1%, while industrial rents fell 0.4% and retail rents dipped 0.2%. The stronger office sector figure reflects the “considerable improvement” in rents for City and West End offices, the group pointed out.

Mike Penlington, director in JLL’s valuation advisory team, said the group expected price discrimination to remain substantial, as the weight of money that had fuelled investor demand at the start of the year tailed off. He added that investors would try to identify opportunities “in a market where rents and values for assets in weaker locations will remain under downward pressure.”

Take-up and construction activity on the UK’s business parks during the first half of 2010 was the lowest in the 14-year history of GVA Grimley’s Business Parks Review. The review, which monitors the supply and demand of office space on business parks across the country, shows that availability rose 11% during H1 2010 with an extra 1.5m sq ft taking the total available floorspace at the end of the first half to 16.3m sq ft. The overall implied vacancy rate reached 17%.

Prime rents remained static or continued to slide during the first half of 2010 – although there were a few exceptions, where rents actually rose. The fall in rents since 2008 appears to have been sharpest in the South East, with more moderate declines in other regions. In the North East, Yorkshire and Humberside rents have remained steady – although once incentives are taken into account, net effective rents have fallen here too.

The trend of declining rents over the past year now appears to be slowing, GVA Grimley says, and positive rental growth is expected to make a comeback in 2011, taking its cue from the current strength in the market for office space to let in central London.

“While this has undoubtedly been a challenging time for developers and landlords, office occupiers continue to find themselves in a strengthening position in lease negotiations. Incentives have remained generous by historical standards, especially the length of rent-free periods,” the group noted.

With public-sector demand curtailed, prospects for business parks will largely depend on the private sector. GVA Grimley notes the government has pledged to increase support to many of the business sectors that typically locate on business parks, which it says is particularly encouraging for the Cambridge and Thames Valley areas.

After yesterday’s results from CSC, here’s some more shopping-centre news. Cushman & Wakefield says yields for prime assets in this sector improved to 5.5% over the second quarter this year, as investment demand has outstripped supply. Yields for smaller and more secondary shopping centres, however, remained relatively static during the quarter, with vacancy rates and falling rents continuing to suppress value.

Charlie Barke, head of retail investment at Cushman & Wakefield, said: “The first half of the year has seen significant yield improvement across the sector, fuelled by investment demand exceeding supply. Looking ahead, demand looks a little thinner and supply appears to be increasing. Whilst prime stock will probably hold up reasonably well, we are concerned about a potential slip in secondary values as the year draws to an end.”

Turnover in the sector during Q2 2010 was similar to the previous quarter, at £673m, but made up of fewer deals – 12 in total, representing 16 shopping centres.

C&W says there are just under £1.1bn of schemes on the market at the moment, including the Ewart properties (Hammersmith, Victoria and Fulham Broadway) with an asking price of £295m, a yield of 5.63%. A number of smaller schemes are either on or are coming to market, include properties in Ayr, St Austell and Dunstable, the group added.

Capital Shopping Centres today posted a 9% rise in NAV for the first half of the year, helped by a 6% increase in the value of its investment properties. Chairman Patrick Burgess said: “We are now looking to drive growth in net rental income from lettings, lease expiries and rent reviews, with a particular opportunity from converting last year’s short-term lets into longer-term lets at higher rents.”

In the first set of results published since the group demerged its non-shopping-centre operations, CSC said net rental income from continuing operations was up 1% with occupancy at 98%. The group, which includes the Lakeside and Metrocentre shopping centres in its portfolio, said footfall in the first half was up 3% year-on-year and 6% ahead of the position reported two years ago.

CSC said that it had the scope through lettings, lease expiries and rent reviews “to capture a 23% uplift from current contracted rents to our valuers’ assessments of ERV,” in particular as a result of retailers wanting high-quality space, which is scarce, and the strong demand for larger units in centres with the best catchments; and by turning temporary lets into longer leases.

“With around £125m of value-enhancing active management projects under consideration and around £500m of potential investment by way of major extensions, the group has significant scope to grow organically without depending on acquisitions,” Burgess added.

British Land today said it remained cautious about the near-term outlook as it reported a 2.2% increase in NAV to 515p per share for its first quarter, the three months to 30 June. The increase in the group’s portfolio valuation was just 1.4%, reflecting the more uncertain economic outlook.

The shortage of available Grade A office space in London continued to drive rental growth in the City and the West End, with rental values up 2.4% during the quarter. The group said occupancy in its offices portfolio had risen 4% to 96.6% during the quarter and it had let 800,000 sq ft of prime London office space during the first half of 2010, with rental levels significantly higher now than they were a year ago.

Rental activity was weaker in the group’s retail portfolio, as occupiers have become more cautious about the outlook for consumer spending, the group noted. However, there was still good demand from retailers for space “in the right locations”. The occupancy rate for the retail portfolio was 98.6%.

Chief executive Chris Grigg said: “Rental growth in the London office market has been good in the last six months and we expect this trend to continue, albeit at a more modest rate, with lower levels of activity in the near term. Further pressure on rental levels in retail is forecast, but we remain of the view that the best locations, where our portfolio is focused, will significantly outperform secondary locations where the supply/demand tension remains weak.”

“Overall, risks to the global economy seem to have increased in recent months and we remain alert to the potential impact of the fiscal measures needed to address budget deficits not only in the UK, but across Europe. While we would not be immune from any material reduction in consumer spending and business confidence, our prime real estate, underpinned by good tenant credit quality and high occupancy, is expected to perform well.”

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.