Now is the time to go bargain hunting on the South West’s business parks.
With rent-free periods growing ever longer, and incentives become more generous, any finance director worth his company car ought to be able to negotiate some attractive deals.
The region’s property brokers say that rent-free periods have already lengthened by as much as 50 per cent around Bristol and Swindon, and are showing similar signs of growth elsewhere.
Competition among developers from the small pool of potential occupiers means they have to offer incentives – and with cuts in headline rents all but impossible due to development funding deals, the only wiggle room is in rent-free periods and contributions to office fit-out costs.
According to some agents it is now typical for a tenant to be offered 45 days rent free for every year of lease term they sign. That means that on a standard five-year lease a canny occupier will get seven months free. An eight-year lease would mean an entire year free of rent.
Landlords and developers hope they will not be forced to extend rent-free periods further. Whether they will be able to withstand the pressure to offer greater incentives – especially to potential occupiers of smaller office units, where the supply and hence the competition is greatest – remains to be seen.
Phil Morton is director of office agency with DTZ in Bristol. He says that shortage of supply in some areas and property types contrasts with shortage of demand in others.
“Occupier demand is holding up in areas like the north Bristol fringe, and limited supply combined with the fact that there will inevitably be occupiers who have to move thanks to lease break-clauses or their leases coming to an end, means we don’t expect the market to be too bleak,” he says.
This office market churn may help keep north Bristol landlords busy – and keep rents up at around £24 per sq ft. But rent-free periods look set to grow.
“For now, lengthening rent-free periods are not a problem for landlords – they are at a level they can accommodate without too much of an issue,” says Morton. But office parks built on the optimistic development appraisals of 2006 and 2007 may struggle in the harsher climate of 2008 and 2009. Few agents are prepared to bet that rent-free periods and contributions to fit-out costs will not grow.
Ben O’Connor, head of business space in the South West for GVA Grimley, agrees that developers will price competitively to win tenants.
“The first three quarters of 2008 were OK – it won’t be a record year by any means, but viewings were happening and terms being agreed. What we are seeing now is that rent-free periods are growing because a lot of out-of-town office space was built in the last few years and that makes it a good market for would-be occupiers,” he says.
“At the smaller end of the market it is definitely good for occupiers because there are more buildings and few occupiers, so landlords and developers will be working hard to ensure that they capture the tenants who show interest.”
The reason for landlord jitters – and the competitive pressure on incentives and rent-free periods – isn’t hard to find. Not only is the economy as rocky as the north Cornish coast, but the supply figures are alarming.
During the summer GVA reported that the amount of space under construction on business parks in the South West was still on the increase.
Best estimates indicate that the volume of new build in the six months to June was up 87 per cent. Of the 264,000 sq ft of new business park space, about three-quarters was pre-let – the largest chunk being a 100,000 sq ft pre-let to Atkins at Aztec West.
Since the summer, conditions have deteriorated and it alarms some observers that around 79 per cent of all business park development is speculative. This compares with a more modest 40 per cent just five years ago.
Meanwhile, although empty business park units are a relative rarity in the South West, the total stock of available (meaning empty) business space in the region grew from 229,000 sq ft to 348,000 sq ft. This amounts to 5.4 per cent of total stock – barely worth noting compared with the 21 per cent recorded in the North West, but a significant increase which no amount of optimistic agent-speak can hide.
Simultaneously – and inevitably – lettings dropped to appreciably below the five-year average. Rents barely moved, ranging from a top-end £24 per sq ft in Bristol to an affordable (but, from a developer’s point of view, unsustainable) £14 per sq ft in Plymouth.
The market for freehold offices – a powerhouse just 18 months ago – has been hit hardest. Sales are still taking place, but mostly to investors and not to the owner-occupiers who, until recently, thought property was a good place for self-invested pension schemes. However, among the recent sales was that of the 8,481 sq ft Redrow House at Exeter business park.
Joint agents Alder King and Stratton Creber sold Redrow House on Exeter Business Park on behalf of Redrow. Connaught paid about £2m, the yield being 6.64 per cent. The purchase came shortly after Connaught moved into the building, which became its regional headquarters.
Iain Bray, commercial director at Connaught, explains: “The calibre and reputation of Exeter Business Park is well known across the South West and so we were very pleased to have secured a place on the park.” So pleased, in fact, they decided to buy it.
Ralph Collison, partner at Alder King, says: “We received a lot of interest in Redrow House. It is a fantastic building and has been constructed to a very high specification.”
Other national occupiers on Exeter Business Park include the Met Office, Ashfords and Exeter Health Care.
New business park developments are underway, though it’s a fair bet that most of those in the earlier stages of planning will be paused until the supply of bank finance picks up again.
In Swindon and north Bristol (see side panels) the market is digesting recently completed developments, while in Somerset, Devon and Cornwall plans are being laid in readiness for the recovery of the UK economy from this year’s financial crisis.
A planning application was submitted last summer for one of the region’s most ambitious business park schemes: the 1m sq ft Weston Airfield site near Weston-super-Mare.
The application to North Somerset district council came from Persimmon Special Projects with the support of specialist business park developers Terrace Hill.
Persimmon special projects director Paul Davis said at the time of the application: ”There have been many false dawns in the past about the future development of the airfield. This application is a clear statement of our commitment to making Weston super-Mare a key employment location.”
There was talk of high-calibre office occupiers and hoteliers already taking an interest in the business campus, to be known as Weston Park.
But since then things have gone very quiet. In the six months to June, Persimmon suffered a massive drop in profits – down from £280m to £101m in the same period last year – and even if profits had been untouched it is doubtful any developers would feel now was the right time to launch such a large scheme in such a relatively untested location. Terrace Hill has also been feeling the pinch.
You will search in vain for news of progress since summer 2007, while Weston Park does not feature on Terrace Hill’s list of current projects.
There is more activity elsewhere. Stonehouse Park, close to junction 13 of the M5 motorway in Gloucestershire, provides some good cheer. The 12-acre business park developed by Robert Hitchins enjoyed success with the first phase, prompting development of 13 small office buildings which have been letting (or selling) well.
Occupiers include Griffith Clarke, Gallery Resources, Independent Financial Services and C & G Services Europe Limited.
The appeal of business parks seems strong and, for those with a nose for a bargain, there are deals to be done.