Bristol’s office market looks set to have a successful end to 2015 – with rents rising – following a quiet start to the year which saw take-up fall by 23%, according to national property consultancy Lambert Smith Hampton (LSH).
In its Bristol Office Market Pulse report for Q2 2015, LSH reveals that a shortage of available stock continues to be the key talking point.
“We have seen a large amount of lower grade stock taken from the market due to permitted development rights and this in turn has led to a narrowing market for occupiers,” said office agency director Peter Musgrove.
“Landlords have increased confidence so are reducing incentives and we are now seeing prime rents being increased. We expect them to break the £30.00 per sq ft barrier by the end of the year.”
There were 24 new office enquiries (over 5,000 sq ft) in Q2 2015. The city has also seen a number of requirements below the 5,000 sq ft limit.
Peter said: “This drop in enquiries was expected after the strong final quarter that we saw in 2014. There is a range of occupiers looking for various different types of space with requirements coming from the professional and creative sectors that generally have very different needs to traditional administration-type offices.
Total take-up of offices (over 1,000 sq ft) in Q2 2015 was 225,555sq ft, compared with 291,339 sq ft in the same period in 2014 .
Total take-up in 2015 so far is 399,084 sq ft, compared to 515,302 sq ft at the end of Q2 2014 – a decrease of 23% year-on-year.
Both the city centre and out of town markets have seen a fall in take-up, when compared to the same period last year. Demand has been affected by a record number of deals at the end of 2014 and the market is now returning to a more constant level of demand. In the city centre market, 27% of take-up in Q2 2015 was grade A and 46% grade B. Due to an increasing lack of grade A stock being available, take-up to is not expected to increase until further stock is brought to the market.
Total office supply in the Greater Bristol market at the end of Q2 2015 stands at 1.4m sq ft, which, working from the five-yearly average take-up seen, is roughly two years’ worth. Peter said there could be some speculative development in the region as supply falls.
“Grade A supply has decreased as we continue to see space being let, with nothing new coming to the market. There are a number of development sites currently available, however, investors are reluctant to start construction without a pre-let for at least part of the space. We expect to see some of these sites start speculatively in the coming months as supply continues to fall.
“This lack of supply has seen incentives reduce and landlords are also pushing their rents. KPMG paid £28.50 per sq ft for top quality space at 66 Queen Square and we expect prime rents to increase by the end of the year. The penthouse suite at 66 Queen Square is now being marketed for £32.50 per sq ft.”
Investment ‘performance strong’
The value of investments transacted in the south west during Q2 2015 totalled circa £3.90 billion, 7% higher than the five year quarterly average. The value of sales for the quarter was, however, 32% lower than in the first quarter of the year.
Peter added: “Performance is strong as investors continue to be attracted to the UK’s leading provincial centres due to the superior returns on offer compared to London. A buoyant occupier market is underpinning an expectation of rental growth which will boost total returns and this is encouraging yield compression across both prime and secondary assets.
“The office market has been particularly strong in major centres, such as Bristol, driven by a strong increase in occupational demand both from locally based businesses, as well as from organisations looking to relocate to the West Country. This has been further bolstered by the city having lost over 1.3 million sq ft of secondary office space to residential through permitted development rights and a serious shortfall of grade A space being available.”
Key deals in the first half of the year include:
*Orchard Street Investment Management completed the purchase of 10 Templeback on behalf of St James’s Place. The property comprises 124,198sq ft of grade A office space which Benson Elliot sold for £58.5m. It has a passing rent of £3.3m pa with 41,000 sq ft of space still vacant.
• CBRE Global Investors has purchased the freehold of the Lyons Davidson Offices on Queen Square for £4.9million, reflecting a net initial yield of 6.32%.
• Aviva’s purchase of Skanska’s speculative office building for £32.7m shows that investor confidence is returning following the recession. KPMG signed for the majority of the property at the end of Q4 2014 for a 10 year lease at £28.50 per sq ft and Handelsbanken has taken ground floor space on a 10 year lease at £28.50 per sq ft.
