2011 South West commercial property market review and 2012 preview

Nick Allan, Senior Investment Director, gives his outlook on the investment market for 2012:
“This year’s investment trading has been flat and the Investment Property Databank (IPD) reported a small fall in the capital values across the piece, with investors really having to manage income to generate any real performance. The early signs are not overly encouraging for the secondary market for 2012, as yields are predicted to continue to drift with the divergence between prime and secondary now standing at over 600 basis points (230 at the peak of the market). Nevertheless, where secondary opportunities do present themselves a more diverse range of investors are eyeing the market, with particular interest in industrial estates, shopping centres and retail warehousing sectors up.

“While property company legacy issues are continuing to be addressed, albeit certainly not at the rate the market had expected in terms of exit strategies, the continuing weakness in the occupational markets will remain a brake on the market and will mean that the secondary and tertiary risk premiums will continue to rise. This is obviously a generalisation across all non-prime assets, however there are certainly opportunities to secure some key assets in the current market and take advantage of softer pricing, as some assets offer credible value creation opportunities and these will ultimately focus back on the core components of the asset including location, specification, demand, supply, planning and sector. Moreover, there is no doubt that the core economies of the south west are holding up better than others including Bristol, Bath and Exeter, as well as Bridgwater due to the proposed power station development.

“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 due to the availability of debt and the strength of the occupier market, 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 capital values detracting from income received.  Nevertheless, quantitative easing induced low interest rates mean that annuity style income with long leases and fixed uplifts is continuing to be the hot ticket 2012.”

Will Nell, Associate Director in Industrial Agency, gives his outlook on the industrial market in the south west:
“During 2011 there has been an interesting amount of take-up of large buildings in the region.  There have been pre-lets in Avonmouth of 380,000 sq ft to Co-Op, and 50,000 sq ft nearby at Severnside to Chep. These are both build to suit facilities, caused largely due to a lack of Grade A stock within the south west market. In Bristol, with the exception of the B&Q facility at G Park, Swindon which was completed during the year, take-up has been of older buildings and indeed the south west generally has the lowest availability ratio of Grade A buildings in the UK. Whilst occupiers of larger buildings will wait for a new building, those of smaller buildings are less likely to do so, as their requirements tend to be more immediate. Consequently, the better quality Grade B buildings will be taken up during the remainder of 2011 and going forward into 2012, but the market is likely to suffer a distinct shortage of good quality buildings during 2012 as less new supply is brought to the market. Given the financial caution which prevails in the market, speculative construction is unlikely to happen in the short-term, with the result that a shortage of supply and continued demand at similar levels will result in increased rents and costs for occupiers. At Bridgwater, the Morrison’s warehouse is ready, and enjoys a very dominant position on the M5. 

“Elsewhere, close to Bristol city centre there have been a number of smaller transactions with companies generally feeding into the local business community. However, in this sector as well as for the larger buildings, there remains a shortage of supply of good quality facilities.

“There is a good supply of available land in the Avonmouth area, but elsewhere in Bristol, there is limited availability, with a similar picture in Swindon, the other major market of the south west. However, it is likely that markets such as Exeter will also evidence greater activity over the next 12-18 months as new development schemes surrounding the airport attract occupiers.”

Phil Moore, Senior Surveyor, Office Agency, gives his outlook on the offices market for 2012:
“General sentiment remains one of caution. Lease events, consolidation and cost saving continue to drive activity. Opportunism is still commonplace, with tenants reaching lease events looking to take advantage of the current economic climate to upgrade to better quality space for equal or even reduced cost.

“We are seeing certain trends which are driving demand for office space. These include businesses consolidating several regional operations into a single office, occupiers looking to make significant cost savings, and those looking to make more efficient use of their space. In addition, we are increasingly witnessing companies who have bucked the trend and traded successfully in the current economic climate. A number of these businesses are placing increasing importance on recruitment and staff retention and recognise the importance that the office environment plays on this. Whilst cost remains a key driver, the quality of office accommodation has recently become higher on the agenda for many companies re-location aspirations.

“Throughout 2011 concerns about future occupational demand and the significant levels of supply evident in the market have resulted in an environment where very competitive terms are available. Key deals through the year have included CMS Cameron McKenna who acquired 26,300 sq ft of office accommodation in the only office pre-let of 2011 at 2 College Square (Harbourside), Triodos Bank who acquired 27,000 sq ft of Grade A office accommodation at West One and ACS HR Solutions who have taken 8,900 sq ft on the 5th floor of Temple Circus.

“The Bristol city centre office market will need to witness a significant increase in take-up in the fourth quarter of 2011 in order to hit the annual take-up figure achieved in 2010 (459,000 sq ft).  However, on the back of a number of reasonably large deals currently in lawyers’ hands, we expect a bounce back in the take up for Q4.

“Looking forward, DTZ anticipates that demand during 2012 will originate from a wide range of sectors and the general level of demand will remain steady during the first six months. We expect an increasing proportion of grade B take-up going forward, following a return from the mid-sized professional and media sectors. Rents for better quality space are expected to remain largely unchanged over the course of the year and a modest reduction in rent-frees or other incentives available to incoming tenants are anticipated as the supply of grade A space reduces.”

Robert Parr-Head, Valuation Director, gives his thoughts on the investment market:
“The funding market continues to prove a barrier for property companies seeking to exploit assets that provide realistic asset management opportunities. Nevertheless, there has been a marked increase in the number of lenders looking to re-enter the debt market. High street lenders, who have historically underpinned the debt market, are actively re-targeting new relationships with potential customers who have a proven track record in prudent longer-term purchases and asset management plays. The quality of the borrower and the sustainability of the income stream are key factors for a lender.

“Whilst the number of funders is significantly reduced from 2008 levels, there have also been new entrants to the funding market, albeit on historically cautious terms. The uncertainty in the secondary market is such that lenders are unlikely to commit beyond a loan to value ratio of more than 50% to 60%.”