Take-up on business parks amounted to 2.1 million sq ft, 9% below the five-year six-monthly average, during the second half of 2015, according to Bilfinger GVA’s latest bi-annual Business Parks Report.
Reflecting the national picture, activity in the Midlands was muted, down over 20% on the five-year six-monthly average with 292,000 sq ft of deals completed.
The 63,000 sq ft pre-let to Tata Technologies for its European headquarters at Tachbrook Park was the largest deal in the second half of the year, followed by BT Group’s 20,000 sq ft letting at Aquarius, Birmingham Business Park and two lettings of 10,000 sq ft at Eagle Court, one of which was to Virgin Media.
While construction activity as a whole has fallen significantly over the last 12 months, availability has increased slightly in the Midlands through a combination of refurbishment of existing stock, as seen at Birmingham Business Park and Blythe Valley Park, completion of new buildings, and the expiry of historic 20 and 25 year leases.
Comparatively, the South West and Wales performed the best against its five-year six-monthly average, at 63% above, followed by the North West at 28% and the North East and Yorkshire at 16%. The South East and East, which on average makes up a third of all activity, was 30% below its five-year average. As with the Midlands, activity in Scotland was also more than 20% below average.
However, the Midlands remains the only area where availability is at or about 9% which we have consistently seen as the threshold below which rental growth kicks back in.
Adrian Griffith, Director at Bilfinger GVA, said: “This fall in take-up really goes against where the markets have been heading in the last two and a half years, representing a blip in an otherwise upward curve that demonstrates high demand and diminishing supply.
“We’ve seen a consistently improved demand over the last couple of years with growth in almost every quarter which, combined with a lack of speculative development, has put supply on business parks at a 10-year low.
“There is some stock coming back as 20 and 25-year leases are coming to an end, with a good deal of refurbishment taking place, bringing these buildings’ specification up to modern Grade A standards and at a level that is appealing for today’s occupiers.
“This puts landlords in a strong position, securing longer-term leases at better rents, with some returning to the equivalent values that we saw in the mid-1990s, with values beyond those that many of these buildings will have recorded before.”
National availability fell to 15.1 million sq ft (15%) at the end of 2015, however the decline in availability is not consistent across the regions. While construction has almost halved from a high of two million sq ft 12 months ago (compared to 4.5 million sq ft in 2009), with 44% being delivered speculatively, this is virtually all concentrated in the South East.
Carl Potter, Senior Director and National Head of Offices at Bilfinger GVA, said: “A number of refurbishments are underway as 15 and 25 year lease events bring space back to the market. This is a trend we anticipate continuing as a consequence of the lower capital commitment required compared to new build and the levels of flexibility expected by occupiers. The success of business park lettings shows the demand for out of town quality Grade A stock with integrated transport links.”
Throughout 2015, investment in business parks across the UK was the highest it has been since 2006; amounting to £2.5 billion, up from £2.2 billion in 2014. Overseas investors accounted for 30% of all transactions, while UK property companies and institutional investors both maintained a strong presence, accounting for around 25% of value each.
This high level of investor demand continued to apply downward pressure to business park yields, which fell by 78 basis points over the year. The annual total return for UK business parks peaked in 2014 at 21.4%, moderating to 13.5% for 2015 as the rapid pace of downward yield movement eased, however Bilfinger GVA expects to see a return of circa 7% for 2016 as a whole with rental growth rather than yield shift driving performance.
