‘2011 office take-up broadly in line with last year’ – David Tonks, Head of Office agency at DTZ in Birmingham, reviews the offices market:
“At the start of 2011 there was a general expectation that the fragile state of the EU would impact on occupational demand across all sectors of the office market. Concerns about the economic backdrop did largely prove to be justified in a number of markets where increasing supply and limited occupational demand have had a tangible effect on activity levels. However, the core central Birmingham office market has proved to be far more resilient than the majority of competing regional centres and attracted demand from a large number of business sectors.
Take-up for 2011 within central Birmingham was 650,000 sq ft broadly in line with the long-term average and almost identical to the take-up in 2010. Over 120 deals were completed during the year involving an average headline rent of £14 psf.
The unfolding debt crisis in the eurozone continues to adversely affect confidence amongst occupiers and a number of large potential requirements across the Midlands region are known to have been put on hold or delayed during Quarter 4 2011, pending more predictable trading conditions.
As we enter 2012 the prevailing economic conditions are reflected in the nature of active demand for office space, dominated by local cost conscious occupiers. The substantial majority of enquiries involve occupiers seeking to take advantage of a lease expiry or break clause within their existing accommodation and this looks set to continue whilst the second-hand market remains weak.
The combination of fragile occupational demand and the widely reported challenges in the funding market suggests that speculative development will be largely absent from the market for at least two years, increasing the prospect of refurbishment projects, particularly by larger funds.
The varied nature of space available in the market has meant that occupiers considering relocation are still able to secure flexible lease terms and exceptional value for money. This will generate further demand over the next 12 months as occupiers take the opportunity to move into better quality accommodation. Consolidation also continues to be a key driver of demand and this trend looks certain to continue into 2012.
Looking ahead to 2012, the challenging market conditions will no doubt provide opportunities for both occupiers and investors and the business change that is inevitable over the next 12 to 24 months will result in sustained activity amongst both occupiers and investors.”
‘Speculative development unlikely in 2012’ – Jonathan Robinson, Associate Director, Industrial Agency gives his outlook on the industrial market in the West Midlands:
“The year began on par with 2010; market sentiment and enquiry levels in the region remained constant for the same period last year. Letting activity and enquiry levels at the start of 2011 were dominated by the storage and distribution sector with little activity from the retail sector. However, demand for industrial space in the West Midlands experienced a significant boost in Q2 2011 following news that Jaguar Land Rover was going to keep open both of its factories in the region after initially considering consolidating into one location, and then announcing an extensive expansion of its model range.
Although the automotive sector has clearly been a significant driver of demand in 2011, the retail sector also delivered huge activity during the year with the most notable deal being at the 700,000 sq ft G Park in Rugeley which attracted online retailer, Amazon for a regional distribution hub.
The highlight of 2011 in the industrial market was undoubtedly news that Jaguar Land Rover would be setting up a new engine plant at the i54 site in Pendeford, just outside Wolverhampton. Although we are still waiting for this deal to be formally completed, JLR will be taking land for a building of about 800,000 sq ft, which once complete, will create jobs and additional Tier 1 and 2 activity.
In the east of the region, Clowes Developments has secured retailer, Co-Op which is taking a new build distribution warehouse of 450,000 sq ft at their South Normanton site.
Other major deals in the region include Goodrich which has purchased 25 acres at Birmingham Business Park to create a high tech facility associated with the automotive sector. We have also seen Goodrich purchase a design and build warehouse of 160,000 sq ft at Network 40 in Banbury for a price of £68 per sq ft. First Line Limited has also completed a deal on a design and build warehouse of 120,000 sq ft on an adjoining site, taking a 25 year lease at a rent of £4.90 per sq ft. Plastic Omnium has acquired 120,000 sq ft at Hams Hall on a 10 year lease at a rent of £4.75, Aston Martin Lagonda have also taken 80,000 sq ft at Chase Point, Coventry on a 10 year lease with five year break option, 10 months’ rent free at a rent of £5 per sq ft and at Magna Park, Lutterworth, a 275,000 sq ft warehouse, Solar was also sold to Stobart Group at a price of £51 per sq ft.
During the year, we have seen the take-up of Grade A and good quality Grade B stock outweigh the release of space coming back on to the market. The shortage of Grade A space in prime locations has meant that occupiers are having to be flexible about their location and building specification if they need a building immediately or on a short-term lease, with a number of them opting for build to suit options.
We anticipate deal terms for occupiers will become less attractive during 2012 as a result of the Grade A supply shortage, with incentives on good quality buildings hardening and reducing in the region. Headline rents remain constant, but we are likely to see a gradual increase of about 1.4% per annum between 2012 and 2015.
Speculative development continued to be subdued during 2011 because of difficulties in obtaining finance and the uncertain economic climate, and this situation is likely to continue.
We anticipate that in 2012 modern Grade A and good quality refurbished Grade B stock in quality locations will continue to attract occupiers. The big question is will we see the return of speculatively built industrial/warehouse property in quality locations?
Answer: The market is crying out for it, but without the backing of financial institutions and increased economic confidence, this is unlikely to happen in 2012.”
‘Bank funding will remain tight in 2012’ – Stephen Kirby, Associate Director, gives a Valuation perspective on 2011 and 2012:
“There has been an increasing polarisation of investor requirements in 2011 with property funds unwilling to invest in non-core locations, but willing to pay aggressive prices for long-term income in established locations. At the other extreme, the lack of debt finance has removed a significant proportion of investors from the market place, leaving those with access to debt, albeit restricted by tighter banking covenants, now unable to reach the capital value levels previously witnessed.
The remaining marketplace comprises property companies and vulture funds that have access to capital and are acquisitive, but who are currently being extremely selective in their purchases. The overall result has been a decline in capital values, especially in relation to secondary assets, where income level and yield compression have manifested discounted achievable capital values.
Maintaining capital values this year has been challenging and we expect this to continue next year, with even the most proactive asset management strategies being unable to mitigate capital decline. This is particularly prevalent in secondary locations where anticipated rental declines are now being realised on lease renewals and new lettings, with capital value being further compounded by investor appetite and yield compression. The differential between property classed as prime and secondary continues to widen.
Bank property funding has remained tight throughout 2011 with all the major High Street banks looking to re-gear facilities or preferably exit existing loans. We do not envisage this easing as we move into 2012 and, in some cases, we anticipate banks considering more aggressive action throughout the year as they are forced to deal with stressed loan facilities. Banks continue to have an appetite to lend but their criteria restricts them to consider properties in prime locations that are well let with long-term income from tenants with strong covenants.
Although the current secondary market scenario is generally gloomy, there are winners with those properties providing annuity style income with good tenants being much sought after. Purchasers will not find it difficult to acquire funding, at appropriate levels, for the best located, high quality properties with the best re-letting story. We anticipate that these assets will outperform in 2012. However those properties with a mix of short income streams of poorer build quality within weak occupational markets should expect to see further and sustained outward price movement.”
‘Investment activity in 2011 was subdued’ – James Bladon, Associate Director, Investment agency gives his thoughts on 2011:
“The Queen described 1992 as her annus horribilis, but 2011 hasn’t been much better for the investment market in the West Midlands. Transactional activity has been subdued – the capital value of West Midlands’ investments traded so far this year has been about half the amount of 2010 – and Investment Property Databank (IPD) has reported anaemic performance for the first three quarters. Investors are very much reliant on income, with a 4% fall in the capital value of offices in the West Midlands standing out as a particular drag on performance.
The market has been hit by the wider economic malaise, particularly since the eurozone sovereign debt crisis escalated over the summer. Active investors are targeting well-let prime properties in a narrow range of sectors and locations, such as central London offices or supermarkets. For other sectors/locations, and as the quality of the investment deteriorates, demand and prices fall exponentially, due to concerns about occupational prospects and with a lack of available finance constraining traditional buyers; this is demonstrated by a yield gap between prime and secondary property, nationally, of 400 basis points, compared with 200 basis points at the end of the boom.
Looking forward to 2012, it is not too difficult to predict that there will be little improvement in the investment market. The economic outlook remains bleak, with the Chancellor of the Exchequer forecasting 0.7% GDP growth for the year (compared with the revised expected outturn for 2011 of 0.9%), while eurozone leaders still show no real appetite to tackle the sovereign debt crisis. Investment market activity will remain focussed on prime, with pricing steady due to a limited supply of suitable opportunities; outside London there is little development activity to create new stock. In contrast, the supply of secondary properties coming to the market is likely to increase as lenders continue to unwind their loan books but, with fewer willing and able purchasers, pricing is likely to soften further. The latest Investment Property Forum (IPF) consensus forecasts, which canvass the opinions of 30 property advisors and fund managers, is for a total return of 4.5% in 2012, with falling values detracting from income received.”