Scottish office market

Transcription

1 RESEARCH Scottish office market Winter 2011 review

2 Contacts Scotland Andrew Cartmail Tel: +44 (0) Don Young Tel: +44 (0) Douglas Gardiner Tel: +44 (0) Richard Williams Tel: +44 (0) Research Jo Warren Tel: +44 (0) BNP Paribas Real Estate 20 Charlotte Square Edinburgh EH2 4DF HIGHLIGHTS Although still tough, 2010 was an improved year for the Scottish economy, as it continued its emergence from the deepest recession in decades. The outlook for 2011 is more positive as the recovery continues in the context of a market which is offering very little by way of new Grade A office supply. There has been an improvement in the Edinburgh occupier market with take-up reaching 596,000 sq ft, up 30% on the 2009 level. Looking forward, the lack of available Grade A space is becoming an increasing cause for concern for prospective tenants. As a result during the course of 2011 and 2012 incentives are likely to reduce significantly and rental growth is a distinct prospect as the City of Edinburgh Council s Conference Square development is the only scheme currently under construction and not due to complete until Subdued occupational markets and a shortage of available product have hampered the Edinburgh investment market, with 2010 transaction levels estimated at 109 million, down 45% on the 2009 level. Glasgow has enjoyed healthy take-up in 2010, with competition strong for well located city centre schemes offering quality Grade A space. Like Edinburgh the lack of well located, available Grade A space is becoming an increasingly pressing problem. Transaction levels in the Glasgow office investment market held up well in 2010 with total investment reaching 333 million, an increase on the 2009 level of 249 million and well up on the 97 million recorded in There are early signs that city centre development sites are becoming increasingly attractive to investors, who are acutely aware of the impending Grade A supply issues facing the occupier market. ECONOMY Despite its challenges, 2010 was a better year than 2009, with the UK emerging from the deepest recession in decades. The Scottish economy has also improved with the Lloyds TSB Scotland s Q Business Monitor Survey confirming Scotland s continuing recovery from the recession. However, even with this positive improvement, the outlook for 2011 still remains dampened by the uncertainty of the impact of the October 2010 Coalition Government s Comprehensive Spending Review. Within the review Chancellor George Osborne announced the severe fiscal tightening of the public finances and the shedding of thousands of public sector jobs. This report is provided for general information only. While every care is taken to ensure its accuracy, BNP Paribas Real Estate accepts no liability for any loss or damage arising from its contents. For Scotland the full impact of these cuts won t really be known until mid 2011 at the earliest, following the May 2011 Scottish Parliamentary election, as the SNP is keen to avoid sweeping reforms before this time. In the interim it has published its spending plans and draft Scottish budget covering just the 2011/12 reporting period. As would be expected, this doesn t commit to a longer term strategy to tackle the 7% cut in Scotland s public sector budgets, but it does confirm pay freezes for thousands of public sector employees in an attempt to safeguard jobs. Copyright BNP Paribas Real Estate 2011 Scottish Office Market Winter 2011 Review

3 EDINBURGH OFFICE MARKET Market Overview For the Edinburgh office market, like much of the UK, 2010 was a challenging year. This difficult period shows little sign of abating over the coming months, as the city awaits further news on the scale of public sector and financial services job losses. These sectors are both crucial to the Edinburgh economy, with Scotland s two largest banks The Royal Bank of Scotland and Halifax Bank of Scotland (HBOS) both located in the city and both announcing job cuts. The public sector is also a major employer, with the Scottish Government and City of Edinburgh Council both based in the capital and both expected to see job losses. Demand When looking at demand levels, 2010 saw an improvement on 2009 with annual take-up reaching 596,000 sq ft, 30% higher than the previous year when take-up was just 457,000 sq ft. In 2010 the market continued to be dominated by smaller deals, with only two deals exceeding 30,000 sq ft. Previously in more buoyant years we would expect to see three to four transactions in the 30-40,000 sq ft size category. In addition, there have also been no major pre-lets, which have further dampened take-up levels. Waverley Gate has been one of Edinburgh s 2010 success stories, securing the largest city centre deal of the year with NHS Scotland taking 37,000 sq ft. In addition, it also succeeded in attracting clothing retailer H&M and development body Creative Scotland, who signed up for 15,000 sq ft and 13,000 sq ft respectively. There is also a further 12,000 sq ft currently under offer to Amazon. In May 2010 Highcross bought the 213,000 sq ft former General Post Office building from the administrator of the building s former owner Castlemore, for 30 million. The subsequent turnaround of this building s fortunes was a direct reflection of Highcross willingness to consider more flexible lease terms and a repositioning of the rental package being offered. What can be deduced is that in the current market, the greatest demand remains for space that is appropriately priced. Waverley Gate is just one example where re-pricing has worked, but in the out of town market Edinburgh Park is another. In 2001 rents at the Park were per sq ft, today they are around per sq ft. It is through this re-pricing that the scheme has continued to attract tenants throughout the recent economic downturn, with recent lettings including deals to JDSU and the RSPB. Edinburgh office take-up and prime rents Take-up (million sq ft) Prime rent ( per sq ft) Source: BNP Paribas Real Estate Major office deals, Edinburgh Property Date Size (sq ft) Occupier Market EHQ, South Gyle Q ,000 Tesco Finance Out of town Waverley Gate, 2/4 Waterloo Place Q ,000 NHS Scotland City centre The Cube, Leith Street Q ,000 Baillie Gifford City centre Waverley Gate, 2/4 Waterloo Place Waverley Gate, 2/4 Waterloo Place Edinburgh Park, 7 Lochside View Q ,000 H&M City centre Q ,000 Creative Scotland City centre Q ,000 JDSU Out of town The Cube, Leith Street Q ,000 Glenmorangie City centre Carlton Square, Greenside Square Q ,000 Baillie Gifford City centre Tanfield, Inverleith Row Q ,000 Trainline Out of town Tanfield, Inverleith Row Q ,000 Craneware Out of town Source: BNP Paribas Real Estate Looking ahead into 2011, we expect another challenging year, although we are cautiously optimistic about the demand that is emerging from new financial services operators. This was a trend that we started to see over the latter half of 2010, as new financial service operators began to take advantage of the high calibre of financial staff currently readily available in the Edinburgh job market. These included Tesco Bank, who acquired 97,000 sq ft at EHQ, South Gyle and Virgin Money, who is understood to be under offer on around 20,000 30,000 sq ft in the city centre, as it plans to create 200 new jobs in preparation for the 2011 launch of its Virgin Bank. I3I

4 Supply & development Availability at the end of Q was 3.1 million sq ft, marginally down on the Q level of 3.2 million sq ft. Unlike previous cycles, this time there is no overhang of developed space from the last cycle swamping the market. In fact the concern is now increasingly focused on the growing lack of available Grade A space, which is a problem that will not be rectified in the foreseeable future with only one speculative scheme currently under construction in the entire Edinburgh office market. This is the 190,000 sq ft Conference Square scheme on Morrison Street, which is being developed by the City of Edinburgh Council and due to complete in Aside from the lack of Grade A space, there are also a number of other concerns facing the Edinburgh office market. Firstly, the very real possibility that a large amount of second-hand space could hit the market if the expected job cuts in the financial services and public sectors are severe. At this point in time, the scale of this problem is impossible to gauge, not only because there are no precise figures confirming the number of job losses, but also because no one knows how much grey space (under occupied space) is currently floating around the market. Secondly, there is the added problem that the majority of this surplus space is unlikely to satisfy the occupier market s current appetite for Grade A space and with landlords reticence to undertake speculative refurbishment programmes, inevitably there will be a further rise in the already oversupplied Grade B submarket. Rents There was no change in the prime rental level in 2010, remaining at per sq ft for the second consecutive year. Incentives have however continued to be significant, although there has been little increase on the previous year. A rent-free period of three months per year of term certain is not uncommon in the current market. Investment Total investment in Edinburgh offices for 2010 was estimated to be 109 million, down 45% on 2009 when it reached 201 million. This is predominantly a reflection of the tough occupational market, which has resulted in a very limited supply of new Grade A investment stock coming onto the market. Grade A stock with long-term income streams has largely been the product of choice for investors in Secondary offices continued to suffer, due to the shortage of active lenders. In Q1 and Q2 2010, investor demand for well-let office investments was strong, driven primarily by demand from UK institutions and equity-rich overseas investors, who were chasing a limited supply of stock. As a result, yields were driven down over this period. In Q3 and Q the investment market slowed in activity levels. This is evident in the official data, with the IPD Quarterly Index for Edinburgh showing the gradual fall of capital values during the course of the year. The latest IPD Quarterly Index data (to Q3 2010) also showed that the Edinburgh initial yield has now stabilised at 5.8% for the second consecutive quarter. Negative rental growth still remains an issue, although the pace of decline has slowed from -2.0% in Q to -0.3% in Q Outlook Looking forward, weak occupier demand is likely to continue into 2011 as a result of the inevitable contraction in the public sector and further cuts in the financial sector. There may be a very small rise in the prime rental level, as the constrained Grade A supply level puts increasing pressure on rents. Incentives are likely to continue to stabilise and possibly reduce for the better specified stock. An interesting project to keep an eye on, is the City of Edinburgh Council s proposed use of tax-incrementing finance to facilitate infrastructure works at Leith Waterfront. Although this funding model has been successfully used in the US, it has yet to be implemented in the UK, so this scheme could be the first of its kind. Indeed, if it is successful, the Scottish government believes that it could potentially unlock 660 million of private investment and create up to 4,900 jobs. In the investment market, Edinburgh will continue to attract UK and international investors in The major conundrum will be whether there will be suitable stock available, as a pickup in the occupational markets is required in order to release new stock in the market. With sterling expected to remain weak and yields hardening in London, the major regional city centres are likely to attract interest from overseas investors given the positive yield differential. Key Edinburgh investment transactions Address Date Sale price ( m) Yield Purchaser Vendor Comment Waverley Gate, 2/4 Waterloo Place Q Highcross Castlemore receivers 213,000 sq ft multi tenanted city centre office building. 50% vacant Quartermile 2 Q % AFIAA Investment Company Gladedale Capital Edinburgh Quay, Phase 2 Q % Cordea Savills ECF Miller Developments/ British Waterways Board Source: Property Data 54,000 sq ft new building, with the top four floors let to Morton Fraser 60,000 sq ft Grade A office scheme multi-let to high calibre tenants (e.g. Lloyds TSB, Baker Tilly) Scottish Office Market Winter 2011 Review

5 GLASGOW OFFICE MARKET Market overview Overall the Glasgow office market has displayed a steady performance in 2010, with a number of sizeable requirements from larger occupiers satisfied throughout the year. Whether this relatively stable market will continue into 2011 is difficult to foretell due to the city s high dependence on the public sector (Glasgow s biggest employer) and its high exposure to the financial and business services sector. With both sectors expected to contract during the course of 2011, it is impossible to gauge the precise impact it will have on the Glasgow economy, which already suffers from above average unemployment levels. More will be known with regard to the public sector job losses after the May 2011 Scottish Parliamentary election. The financial services sector is much harder to predict, although we already know that throughout 2011 Direct Line (owned by RBS) will be closing their Atlantic Quay offices, with 400 jobs lost. Demand Glasgow has enjoyed healthy take-up levels throughout For the central Glasgow area, 2010 annual take-up totalled 579,000 sq ft, up 25% on 2009 when it reached 463,000 sq ft. Throughout the year there has been strong competition for well located city centre schemes offering quality Grade A space. One such example is the 75,000 sq ft 10-storey Clarion Building (now Centenary House), on Wellington Street, which was bought by NFU Mutual in Q from German fund IVG for its own part-occupation. At the time law firm Maclay Murray & Spens was reported to have also been interested in securing space here, but was forced to look elsewhere. In the event it decided to join professional services company Ernst & Young and signed up for 40,000 sq ft at nearby HF Developments G1 Glasgow. A second example was Scottish & Southern Energy s purchase of Stockland s 1 Waterloo Street in Q for its own occupation. This meant that law firm Shepherd & Wedderburn had to look elsewhere to satisfy its 15,000 sq ft requirement, having previously had two floors under offer at the building. Major office deals, Glasgow Property Date Size (sq ft) Occupier Centenary House (formerly Clarion), 69 Wellington Street Market Q ,000 NFU Mutual City centre 1 Waterloo Street Q ,000 Scottish & Southern Energy Titanium 2, Braehead Business Park G1 Glasgow, George Street Alexander Bain House, 15 York Street City centre Q ,000 Ceridian Out of town Q ,000 Maclay Murray & Spens Q ,000 Royal & Sun Alliance Group 144 Elliot Street Q ,00 Anglo-Eastern Ship Management (UK) 225 Bath Street Q ,000 Cunningham Lindsey G1 Glasgow, George Street Clutha House, 120 Cornwall Street South City centre City centre City Centre City centre Q ,000 Ernst & Young City centre Q ,000 NHS Greater Glasgow & Clyde Capella, York Street Q ,000 Strathclyde Pension Fund Source: BNP Paribas Real Estate Out of town City Centre In the out of town market activity levels were subdued, with the largest letting of 2010 being a 53,000 sq ft pre-let to global HR and payroll services group Ceridian at Braehead Two LLP s Titanium 2 scheme. The company cited the quality of the local workforce and its close ties with the University of the West of Scotland for its scheme choice. Overall the market continued to be dominated by deals below 5,000 sq ft. I5I

6 Supply & development At the start of 2010, the restricted supply of new Grade A floorplates in excess of 10,000 sq ft that has historically affected the Glasgow city centre office market was temporarily alleviated, following the completion of a number of new sizeable speculative schemes in late 2009/early Following strong take-up of this space in 2010, this situation is now reverting back to trend and the problem is again beginning to resurface. Indeed it was this Grade A supply issue that reportedly led Miller Developments to buy the development site 10 Anderston Quay from Begbies Traynor (the administrator for former owner Kenmore Broomielaw). The site has consent for 223,000 sq ft of offices, although Miller will not build speculatively and is believed to be considering a mixed used scheme. Although Glasgow has a number of suitable development sites with full planning consent, the reality is that even despite the impending Grade A supply issues, they are unlikely to proceed in the near future because of the current difficulty securing funding. The only sizeable city centre scheme currently under construction and due to complete in the latter half of 2011 is Dawn Group s Collegelands regeneration project. The first phase includes 102,000 sq ft of office space, pre-let to Glasgow City Council. Proposed Glasgow city centre scheme >150,000 sq ft Property Status Sq ft Notes 220 Broomielaw FPPG 389,000 Planning consent for three office buildings City Science, College Street Abby National Car Park Site, 301 Vincent Street 1 & 2 Atlantic Square, York Street Bothwell Plaza, 177 Bothwell Street McAlpine St/ Washington St FPPG 349,900 Mixed use scheme, including hotel, retail, leisure & residential space FPPG 250,000 Future unknown site owners went into administration FPPG 227,000 FPPG 193,800 Mixed use scheme, including retail, leisure & hotel space S ,400 52/62 Renfield Street FPPG 172,000 Remainder of Cuprum Site, Cadogan Square, Cadogan Street Former HBOS Building, 110 Queen Street Source: PMA/Glasgow City Council OPPG 167,900 FPPG 156,300 The oversupply of space continues to be a feature of the out of town market. One new development that is currently suffering from the poor timing of its completion is TAL CPT Land Development s Maxim scheme at Eurocentral. Built in an Enterprise Zone on the outskirts of Glasgow and completed in 2009, the 756,000 sq ft office element remains largely empty. Rents At the end of 2010 Glasgow prime rent was per sq ft, down 9% from its 2008 peak of per sq ft. Incentive levels continued to remain aggressive throughout With no speculative completions due until 2014, incentive levels are likely to decrease as Grade A availability tightens. Scottish Office Market Winter 2011 Review

7 Investment The Glasgow investment market has performed well throughout 2010 with total investment estimated at 333 million. Although the investment transaction level continued to remain below the peak of the market in 2005 and 2006 when it soared to over 500 million per annum, it was markedly better than the 2008 and 2009 levels of 97 million and 249 million respectively. The VP sales of Clarion to NFU and 1 Waterloo Street to Scottish Southern Energy, both for their own occupation, have assisted the take-up levels but hampered investment transaction figures. Like Edinburgh, it is the prime well located buildings, with secure long term tenants that have attracted the majority of investor interest. This is evident in Union Investment s purchase of Equinox, Cadogan Street and SEB s purchase of 110 Vincent Street. It is Glasgow s current property market dynamic, with a low supply of Grade A space, strong tenant demand and the current strength of weighting towards landlords that is appealing to investors. With the imminent Grade A supply crisis looming in the city centre, the Glasgow market has begun to see a rise in interest in development sites, as vendors start to look at capitalising on this pent up investor demand. To illustrate the scale of this demand, in the recent sale of Lloyds Banking Group s 110 Queen Street to BAM Properties, there was reported to have been 15 other bidders for the site, which has consent for a 170,000 sq ft development project. Outlook Glasgow has weathered the recession particularly well from an occupational perspective, with the office dynamics of an under supply of Grade A stock in alignment with the Edinburgh market. The gazumping that occurred at the Clarion Building and 1 Waterloo Street, where two leading legal practices lost out to the NFU and Scottish & Southern Energy, who purchased the buildings for their own owner occupation, is testament to the pent up demand inherent in the occupational market. The limited number of public estate occupiers of Grade A space will ensure that the impact of the forthcoming public sector cuts will have a negligible affect on the Glasgow Grade A market dynamic. In the investment market, in 2011 Glasgow will continue to attract UK and international investors. The major conundrum will be whether there will be suitable stock available. With sterling expected to remain weak and yields hardening in London, the major regional city centres are likely to attract interest from overseas investors given the positive yield differential. When looking at the latest IPD Quarterly Index data, it shows a very small improvement in Glasgow rental growth. After falling to -2.0% at the end of Q (the lowest level since the index begun in March 2001), positive growth of 0.5% was recorded by the end of Q Key Glasgow investment transactions Address Date Sale price ( m) Yield Purchaser Vendor Comment Skypark, Elliot Place Q % Moorfield REF II LP Kenmore receivers 553,000 sq ft office park. Largest tenant is O2 who occupies 110,000 sq ft on a 15-year lease from 2005 Broadway One Q % KanAm Grundinvest Fonds IVG UK/Ediston Properties 126,000 sq ft let to Tesco Personal Finance 110 St Vincent Street Q4 10 c. 40 c.6.25% SEB Europe REI Scarborough Group 96,000 sq ft iconic Grade A building, let to Bank of Scotland with 12 years unexpired 50 Bothwell Street Q % PRUPIM Redevco UK 90,000 sq ft of recently refurbished office space, let to Ignis Asset Management on a lease expiring 2022 Equinox, Cadogan Street Q c.5.75% Union Investment Private Overseas 68,000 sq ft Grade A building, constructed in 2002 let to esure for 20 years unexpired term Source: Property Data

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