Regional Investment Market Outlook. Spring gva.co.uk1

Transcription

1 Regional Investment Market Outlook Spring 2015 gva.co.uk1

2 Investment transactions ( million) BIRMINGHAM Prime rent ( psf) Prime yield (%) Retail Office Industrial Retail Office Industrial Investment transactions ( million) BRISTOL Prime rent ( psf) Prime yield (%) Retail Office Industrial Retail Office Industrial Investment transactions ( million) EDINBURGH Prime rent ( psf) Prime yield (%) Retail Office Industrial Retail Office Industrial Investment transactions ( million) GLASGOW Prime rent ( psf) Prime yield (%) Retail Office Industrial Retail Office Industrial Investment transactions ( million) LEEDS Prime rent ( psf) Prime yield (%) Retail Office Industrial Retail Office Industrial Investment transactions ( million) MANCHESTER Prime rent ( psf) Prime yield (%) Retail Office Industrial Retail Office Industrial , Note: Prime retail rents refer to zone A.

3 Foreword The UK economy saw robust growth of 2.6% in 2014, around the long-term trend rate. However, the real story of the year was the incredibly strong labour market, with 608,000 more people in work than at the end of Unemployment also tumbled from 7.2% to 5.7%, despite strong population growth. Inflation fell sharply, and wage growth accelerated, with the result that earnings growth is now rising in real terms for the first time in five years. Against this positive backdrop, occupier demand rose noticeably in In the office sector, the key regional office markets saw take-up 23% above the five-year average, and a tightening Grade A supply. This was reflected in rental growth, with net effective headline rents among the Big Six rising by an average of 8.5% over the year. Strong market activity and rising rents bode well for an increasing level of speculative development across a number of regional cities during We expect close to trend economic growth this year, with further strong gains in employment (albeit not as strong as last year), and accelerating wage growth in real terms. Occupier confidence remains high, and 2015 should be another excellent year for take-up across all commercial sectors. The value of UK commercial property investment transactions in 2014 was the highest ever recorded, with a significant weight of money focused on the UK s regional markets. This has been driven primarily by improved confidence in the occupational markets, and key investors such as UK institutions, REITs, property companies and US private equity being priced out of London and the South East. The high level of investor demand throughout 2014 resulted in a downward shift in yields. The all-property average equivalent yield moved in by 76 basis points on the IPD Monthly Index, but some sectors saw much sharper falls. Average UK industrial yields tumbled by 116 basis points and offices outside London and the South East fell by nearly 160 basis points. Low bond yields, accelerating rental growth, the considerable weight of money looking to invest in UK property, plus continued recovery in the lending market are all reflected in our 2015 allproperty total return forecast of 11.5%. In this prospectus our investment experts covering the UK s Big Six regional cities of Bristol, Birmingham, Edinburgh, Glasgow, Leeds and Manchester give their insights on where the smart money is heading across the office, retail and industrial sectors. We hope you will find it a useful guide to the marketplace and investment opportunities in 2015 and beyond. Daniel Francis, Head of Research, Bilfinger GVA 1

4 1 St Peter s Square, Manchester

5 Offices Bristol was exceptional in terms of office takeup in 2014, with Bilfinger GVA s final quarter Big Nine grade A office survey showing take-up had increased to triple the five-year quarterly average, says Richard Kidd, Director in Bilfinger GVA s Bristol Office Agency team. You could say the market came back to life in 2014, as it was by far the best year of take-up in the city centre since 2004 at 836,858 sq ft of office space sold or let during the year. In addition to this figure a further 225,443 sq ft of office space was sold to developers mostly for conversion residential uses, further eroding supply. Richard Howell, Director of Investment for Bilfinger GVA in Bristol, adds: The South West as a region and its principal centres are performing well, fuelling investment interest and providing attractive comparative returns. This is further supported by clear evidence of a strong return of occupier demand, real rental growth and limited new supply. The total value of investment transactions in Bristol in 2014 was 557.4m. This is an increase of circa 75% on the 2013 total of 319m. The Bristol five-year investment value average is 374m. There is still a considerable weight of money looking to invest, and the current high level of domestic and overseas demand for UK property looks set to continue. The result will be further downward pressure on yields, particularly for good-quality secondary property in the southwest markets. Total returns of 24% for Bristol offices in 2014 were well above the UK average of circa 20%. We then expect performance to reduce to circa 8% in 2015 as the downward yield movement ends and rental growth becomes an increasingly important component of performance. In terms of inward investment we have started to see more companies looking at Bristol as a serious relocation option and this has been underlined by the decision by Mapfre Abraxas to relocate to Bristol as well as Blue Speak Media, Kidd continues. Going forward we believe the market should continue to improve and prime rents could be pushed on towards the aspirational 30 per sq ft mark to be in line with other regional cities such as Birmingham and Manchester. Birmingham is a world-class business destination and winner of the 2013 FDI Destination of the Future for having the most potential to attract foreign direct investment, points out Damian Lloyd, Bilfinger GVA s Director of Investment in the Midlands. Foreign direct investment created circa 4,000 jobs in 2012/13, with one of the highlights being Deutsche Bank s decision to take 135,000 sq ft at Five Brindleyplace to provide one of its largest sales and trading floors in Europe. In fact Birmingham s business and financial services sector is the second largest in the UK and employs more than 100,000 people in the city and 350,000 in the wider region. This figure is expected to grow by over 30% by Factor in the strong performance in terms of office demand, which saw take-up more than double the five-year quarterly average at the back end of 2014, as well as the likely benefits HS2 will bring to the city if it is completed on schedule, then Birmingham s office market offers plenty of investment potential for many years to come, Lloyd concludes. The Manchester story on supply and demand is extremely strong with only one building complete at 1 St Peter s Square, two under construction and annual grade A take-up of over 400,000 sq ft. Combined with a general overheating in London and the South East markets, many investors have turned to the regions to find better performance, says Mark Rawstron, Bilfinger GVA s Senior Director of Investment in Manchester. 3

6 Trinity Court, Manchester Prime headline rents 36 Prime rent ( psf) Birmingham Bristol Edinburgh Glasgow Leeds Manchester /16 Park Row, Leeds Prime yields Yield rent (%) Birmingham Bristol Edinburgh Glasgow Leeds Manchester Quartermile, Edinburgh

7 2014 saw around 950m of office transactions, a record year albeit skewed by M&G s acquisition of the RBS buildings at Spinningfields for a reported 320m. With 24 years to RBS and structured uplifts this deal set a post downturn record yield at 4.8%, adds Rawstron. Prime yields for more standard lot sizes reflect 5/5.25%, witnessed by NFU s purchase of Chancery Place for 57m and 5% and Orchard Street s purchase of 4 Hardman Sq for 31m and 4.95%. Ardstone, advised by Bilfinger GVA, has been a new entrant to the market purchasing three buildings Ship Canal House, Trinity Court and Pall Mall Court for a total of 56m. There is still huge demand for Manchester offices and we see yields hardening further as the letting market progresses, he concludes. There s a similar northern success story going on over the Pennines: Bilfinger GVA is currently marketing a prime office building let to the University of Law for a further 14 years, located at 15/16 Park Row, which will be a good test for the Leeds prime office market, says Ben Hall, Director of Investment in Bilfinger GVA s Leeds office. The quoting yield is 5.75% and at the time of print we have requested offers. We have seen yields move in, in all sectors over the last 12 months and the prime office sector is no exception. Many investors have spent the past 12 months looking for higher returns, and have been willing to take more quantified risk in order to achieve this. We believe the key factor fuelling this change is the belief in the occupational market. However, the turnaround in confidence in the out of town office market has been somewhat staggering. In Scotland, the market did hesitate from May to September due to the Independence Referendum vote, but quickly continued in a positive trend and as a whole 2014 saw improvement across all investment sectors in Scotland with trading volumes in the order of 2.8 Billion, the highest since points out Stuart Agnew, Director of Investment, at GVA James Barr. Edinburgh s office development pipeline is looking interesting after a dormant two years or so with the Standard Life scheme on St Andrew Square (now pre-let to themselves) and M&G at Quartemile, along with Interserve/ Tiger at Haymarket. This will further stimulate investment, initially through funding and forward commitment to purchase deals. Further letting activity is anticipated at Atria on Morrison Street following an initial flurry of lettings to Brewin Dolphin, The Green Investment Bank and Lothian Pension Fund. Overall Grade A take-up was an impressive 330,000 sq ft, significantly ahead of the last five years average. The Carlyle development at Tanfield is coming to the market in the next week or so at a price expected to be around the 52m, which will be a good test for the market, Agnew adds. In Glasgow, Agnew continues, purchasers in the office sector last year included Ardstone, Rockspring and Deutsche Asset Management. Office development and pre-let activity is very encouraging. We have recently announced two pre-lets at the Mountgrange/ M&G scheme at 1 West Regent Street totalling some 38,000 sq ft. Overall Grade A take-up was in the order of 280,000 sq ft, again well ahead of the last five years average with a number of additional pre-lettings likely to be announced in the first half of the year. Institutions have been hesitant about selling existing assets, many of which were bought wisely in the past five years. Those already invested are choosing to hold out for rental performance. We expect to see further yield compression and then pricing stability; this will come through transactional evidence from the trading of prime stock. 5

8 The Mailbox, Birmingham

9 Retail Birmingham is one the UK s top retail destinations and will be further enhanced during 2015 with the opening of the Mailbox in April, and Grand Central in September. These latest schemes demonstrate the city s continuing ability to attract leading domestic brands, international retailers and high quality restaurant and leisure providers, comments Damian Lloyd. The prime retail pitch is dominated by a small number of large schemes, and as such transactional activity tends to be relatively scarce, Lloyd continues. The largest investment transaction in 2014 was Legal & General s purchase of the 500,000 sq ft House of Fraser department store for 71.5m. Other notable transactions were CBRE Global Investors 15.1m acquisition of The Great Western Arcade and Primark s purchase of the 250,000 sq ft Pavillions Shopping Centre, which it will convert to accommodate a 150,000 sq ft department store for its own occupation. Of all the sectors, high street retail in Manchester city centre has seen the least amount of trading with few retail blocks being marketed, points out Mark Rawstron. Much of the city centre prime retail is in single ownership in the form of the Manchester Arndale, so trading is restricted to one side of Market Street and more peripheral or specialist retail areas. Notable deals have been the sale of the Ground floor retail in Spinningields to CBRE Global Investors for a reported 25m reflecting 6%, TIAA s acquisition of 86 Market Street, let to Barclays for 8.35m and 5.8%, together with the Superdrug unit on Piccadilly for 8.2m and 6.3%. Satellite towns within the Greater Manchester conurbation also saw some value transactions, with Urmston shopping centre being acquired by Threadneedle for 13.3m, 7.2% and the Millgate centre Bury being acquired by InfraRed for a reported 52m and 7.75%, but the high street remains challenging for investors in the northern Manchester towns, Rawstron concludes. The retail scene in Leeds has been transformed, with the opening of Land Securities 350m Trinity Centre development, where major retailers are paying headline rents around 270 Zone A, showing significant growth from the recession lows, says Ben Hall. The Victoria Quarter brought Harvey Nichols to Leeds some time ago now, and it is excellent to see Hammerson extending this with the new Victoria Gate retail scheme which is due to PC in Autumn 2016 and will see John Lewis open its doors in the city, Hall continues. In terms of transactional activity, Orchard Street purchased the Debehnams department store, situated in prime Briggate for a consideration of 35m reflecting a yield of 5.58%. This particular transaction highlights the yield compression in the sector as the vendor acquired the asset some two and a half years ago for around 75 basis points less, he adds. In other activity, an oversees investor is currently marketing a further property on Briggate, comprising two units, though the majority is a new 20-year lease to Yorkshire Bank. At the time of print the bidding is currently rumoured to be around 4.75% NIY, Hall concludes. King Street continues to attract interest from entrepreneurial buyers with No 1 changing hands to Epic UK for a reported 17m reflecting 6%. 7

10 Trinity Leeds Prime headline rents psf, zone A Birmingham Bristol Edinburgh Glasgow Leeds Manchester Prime yields 7 6 Five Brindleyplace, Birmingham Yield rent (%) Birmingham Bristol Edinburgh Glasgow Leeds Manchester

11 In Bristol the retail sector continues to recover strongly with significantly fewer administrations of household names compared with the previous 12 months, although recent Administrations for Bank and USC with Austin Reed s proposed CVA (Landlord/Creditors approval given on 5th Feb). says Chris Wright, Director in Bilfinger GVA s Bristol Retail team. In August 2014 AXA Real Estate Investment Managers acquired Land Securities 50% stake in Cabot Circus/Quakers Friars for 267.8m, for China s Ginko Investment. Current rent roll is 17.3m per annum with Cabot Circus extending to 830,000 sq ft and Quakers Friars a further 170,000 sq ft, Wright explains. Recent lettings in Cabot include those to Pull and Bear (an Inditex subsidiary) of 6,000 sq ft and only the retailer s second store outside London, Lloyds Bank, JD Sports, Smiggle, Vans, Joy, Hotter Shoes, Echo along with restaurants TGi Fridays and Five Guys. Current headline Zone A s in Cabot Circus are approx. 170 with East Broadmead being approx. 125 Zone A with footfall approximately 19m pa. Meanwhile The Mall Cribbs Causeway is trading well with footfall and sales up on the previous 12 months. The John Lewis store is consistently in their top five performing stores by turnover and the M&S store is in their top ten. Lettings in the past 12 months include Jack Wills, Joules, Office, Superdrug, Pret a Manger, Regis, Carphone Warehouse, Moss, Ernest Jones, Krispy Kreme, Watch Lab and Fat Face. There has also been some significant recent upsizing including River Island, Gap, Top Shop/Top Man and Fraser Hart, Wright concludes. Edinburgh s George Street remains a very popular destination and has seen very good rental growth in the last 2/3 years. Princes Street is now showing signs of improvement and has been enhanced by the new tram system and linkages to the airport. It will be further boosted with the St James Centre development by Henderson TIAA with construction due to commence in September. We predict more regular trading activity throughout 2015 as the UK regions remain increasingly popular among the global investor market, says Stuart Agnew at GVA James Barr. Evidence of this was the Zara unit on Princes Street which we sold to an overseas high net worth investor. Another off market deal was the purchase by Standard Life of the block at the corner of Princes Street and South St David Street for c 9m, Agnew continues. The Glasgow retail offer remains attractive with recent purchases undertaken by Henderson- Warburg on Argyle Street and by F and C Reit on St Vincent Street. The core offer is likely to be enhanced by the extension of the Buchanan Galleries Shopping Centre by Land Securities. A number of private investors have also been active including the purchase of the Timberland unit on Buchanan Street for c 4.7%. However, there has been a lack of prime stock available but we do anticipate more trading during 2015 and prime yields likely to break 5% on a consistent basis. 9

12 Brakes, Omega North, Warrington

13 Industrial In Birmingham the industrial and logistics market is running hot, and the secondary market is now moving in from the double-digit yields of only two to three years ago, says Damian Lloyd. Distribution opportunities in the golden triangle and the South East in particular are keenly sought out by institutional and overseas buyers. In particular we are seeing records tumble on long-lease big box distribution. Currently under offer is a 188,000 sq ft let to Triumph at Hinkley for a further 4.5 years. The building is a former manufacturing facility and the asking price of 9.2m (8% NIY) has been beaten by quite a margin, Lloyd adds. It has been great to see speculative development begin across the region in both the office and industrial sectors over the course of I have confidence that the letting market will reward the developers who have grasped the nettle, says Ben Hall, Director of Investment at Bilfinger GVA in Leeds. Bilfinger GVA acted for Mayfair Capital in the acquisition of Latitude 135, comprising a prime distribution unit at Normanton industrial estate, which reflected a 6.25% NIY. This demonstrates how yields have moved in for prime stock, on the back of strong occupier demand and a compelling supply and demand story, Hall continues. With the lack of general development pipeline across the North West region, investment activity has been more muted than pre-recession but where prime opportunities have been marketed there has been intense competition with pricing almost reflecting pre-recession levels, says Mark Rawstron of Bilfinger GVA s Manchester office. The sector generally demonstrates long-term leases and real prospects for rental growth off a low North West base compared to the South East. Omega has been the real success story of the North West market, with nearly 6,000,000 sq ft of occupational transactions and investment trading activity with yields around 6%, lower where structured reviews are included, Rawstron continues. Elsewhere, DHL did a sale and leaseback with Tritax on a ten-year lease at 6.5% at Skelmersdale for an older existing building. As with Birmingham, there is talk of speculative big box development returning and we await real transactional evidence in this sector. North of the Border, GVA James Barr s Stuart Agnew comments that private investor and institutional demand remains strong with two distribution transactions agreed at EuroCentral outside Glasgow by Tesco Pension Fund and AUB commercial PIF. Mayfair Capital also purchased the Central Point Logistics portfolio for 16.1m in mid-year. Interestingly, a number of these deals were agreed off market. In addition we have seen strong demand for multi-let product with yield compression in this part of the market in the order of 50 to 75 basis points in the past 12 months. Other transactions have included the purchase of the Rolls Royce factory at Inchinnan by Epic UK Ltd and the purchase of the Geo post unit at Newbridge, close to Edinburgh Airport, by AXA, 11

14 Hermes Parcelnet, Omega North, Warrington Prime headline rents 7 Prime rent ( psf) Birmingham Bristol Edinburgh Glasgow Leeds Manchester Latitude 135, Normanton Industrial Estate, West Yorkshire Prime yields Yield rent (%) Birmingham Bristol Edinburgh Glasgow Leeds Manchester Farmfoods, Central Park, Bristol

15 Agnew points out. The industrial and distribution market remains strong and popular due to the excellent road network around Edinburgh and Glasgow and we are experiencing yield compression, largely following the UK trend. Bristol is much the same, comments Paul Hobbs, Director of the Industrial and Distribution team in the South West. For eight years now there has been limited prime occupational activity to provide new stock, and any institutional money invested in the sector has tended to stick rather than twist 2014 has shown the best takeup level since 2005, at 2.6m sq ft and availability stands at its lowest level since Speculative development in Bristol is considered a certainty in 2015 as headline rents improve and incentives move in rapidly. During 2014 there was only one notable industrial investment transaction, Hobbs points out. Orchard Street s purchase of Rockingham Gate, Avonmouth, a 100,000 sq ft, four-unit scheme at 10.7m (5.95%). This was a landmark deal based on a weighted average lease length of just 2.5 years. There are some key strategic sites coming to the market in 2015 at East Works Filton, north Bristol. These are prime locations offering choice in a market dominated by the 1,000-acre Severnside Enterpise Area. Any stock created here will be vigorously fought over in investment terms and it is a location to watch, he adds. The city is established as a media and technology hub with world-class ranking. Such clustering may well also create some exciting stock in 2015/16, again one to follow closely. 13

16 Birmingham Bristol Cardiff Dublin Edinburgh Glasgow Leeds Liverpool London Manchester Newcastle Published by GVA 65 Gresham Street, London EC2V 7NQ 2015 Copyright GVA GVA is a Bilfinger Real Estate company. GVA is the trading name of GVA Grimley Limited and is a principal shareholder of GVA Worldwide, an independent partnership of property advisers operating globally. gvaworldwide.com Birmingham Damian Lloyd Director, Investment damian.lloyd@gva.co.uk Bristol Richard Howell Director, Investment richard.howell@gva.co.uk Edinburgh and Glasgow Stuart Agnew Director, Investment stuart.agnew@gva.co.uk Leeds Ben Hall Director, Investment ben.hall@gva.co.uk Manchester Mark Rawstron Regional Senior Director mark.rawstron@gva.co.uk gva.co.uk