Experts at DTZ in Leeds review the 2013 commercial property market and look ahead to 2014.
LEEDS OFFICE MARKET
‘Leeds sees highest year’s office take-up since 2000’ – Eamon Fox, Associate Director in DTZ’s Office agency team:
“The Leeds office market is currently extremely buoyant; we are at a tipping point in respect of supply and demand for new business premises. The supply/demand imbalance we have been discussing for 12 months has now arrived and we are seeing many professional services occupiers move into acquisition mode as expansion and business growth come back onto the boardroom agenda.
“We have seen 535,000 sq ft of business premises transacted in Q1 – Q3 2013, which was 55,000 sq ft more than the whole of 2012. Take-up was at 535,000 sq ft for the year to September 2013; therefore we have seen 535,000 sq ft transacted this year, with expectations for 650,000 sq ft by the year-end. When you compare this to a ten year average of 475,000 sq ft and a five year average of 405,000 sq. ft, Leeds is marching ahead.”
Fox predicts continued M&A activity within the legal sector for 2014, and with many professional firms now taking the view that business growth has returned, the time to yield upon accommodation requirements has arrived, and therefore it looks like 2014 will also be a headline-grabbing year for the city.
“Significant lettings to Dart Group (The Mint), Shulmans LLP (No 10 Wellington Place) and KPMG (1 Sovereign Street) which have taken 73,000 sq ft, 15,200 sqft and 61,250 sq ft respectively have grabbed the headlines. These figures are all the more impressive when you consider the KPMG and Shulmans LLP letting are pre-lets, the first signed in Leeds for just under ten years.
“Q2 2013 has seen the largest letting in the city for ten years, with 76,000 sq ft being let to Yorkshire Building Society at Broad Gate in Leeds. DTZ advised on this scheme and have 130,000 sq ft in Broad Gate alone over recent months, a testament to the strong momentum in the office market.
“The arrival of NFU Mutual’s 35,000 sq ft of newly refurbished space in No 1 Whitehall Riverside comes at a time when there is severely constrained office supply with around just 200,000 sq ft of “Grade A” space currently available in Leeds city centre. No 1 Whitehall Riverside has the largest floor plates and quantity of available “Grade A” office space currently to be found in a single building within Leeds city centre and will be available in December 2013.
“2014 will be dominated by more pre-letting activity, a hardening of rents, incentive packages coming in and we believe at least one new building speculative office scheme. We believe that the low point in the market and consequent maximisation of incentives available in the current property cycle had now passed. It is our view rental levels will begin to stabilise and grow steadily during the period Q1 2014 onwards.”
YORKSHIRE INVESTMENT MARKET
‘Investor confidence will continue’ – Richard Brooke, Surveyor in DTZ’s Investment team in Leeds comments:
“Investor sentiment in Leeds has improved significantly since spring this year, with many investors seeing value in regional markets that offer higher yield returns. Demand remains for prime buildings; well located and let on long leases to good tenants, however with a lack of truly prime product in Yorkshire we have seen many investors starting to creep up the risk curve, most likely to compromise on lease length in order to drive yield. There has also been an increase in investor demand for good secondary opportunities that offer genuine asset management opportunities to improve value.
“Foreign investors have continued to be very active, particularly for the best quality investment stock but 2013 has also seen a significant increase in domestic investor activity.
“The stand out market sector in our opinion has to be city centre offices. The Leeds office market has seen a significant improvement in activity over the last 12 months with eleven significant office transactions completed in 2013 compared with just three Leeds city centre office deals in the whole of 2012. Prime office yields in Leeds have moved in by approximately 50 base points over the year to currently sit at 6.0%, in line with similar trends in other regional markets.
“Looking forward to 2014, activity levels across all major market sectors look positive. With many institutional investors ‘sitting on cash’ we expect that competitive bidding will continue on the region’s best assets. We anticipate that investor confidence will continue to spill over into selected secondary markets resulting in yield compression for good quality secondary stock.”
‘Mixed fortunes for lenders’ – Christopher Murfitt, Director in DTZ’s Valuation team in Leeds:
“As 2013 draws to a close, the Yorkshire and Humberside property markets have seen mixed fortunes from a lender’s perspective. Undeniably, Leeds continues to be the main focus for the larger lending opportunities where well let investment assets have provided opportunities to acquire at attractive yields. However, this, in turn, has caused a hardening of yields within specific sectors such as the city centre office market where a lack of new Grade A stock has increased confidence over rental growth prospects.
“This has had the consequence of bringing ‘good secondary’ assets to the attention of investors where the bank now has the opportunity to lend slightly further up the risk curve in the knowledge that take-up figures for the city centre reflect a good level of enquiries and tenant activity. However, away from the office market remains fragile in out of town locations and within towns such as Bradford, Dewsbury, Huddersfield and Hull where there is a legacy of poor quality stock and a background of very narrow tenant demand.
“Meanwhile, the industrial and logistics markets have generally performed well throughout the year and across the region – the established motorway network providing arterial prime locations. In this sector, investor demand for good quality income assets has been supplemented by competition from the owner-occupier sector who are now in a position to take advantage of write down values in relation to what is otherwise reasonably good quality stock. Capital values of circa £25 per sq ft and less for larger buildings has been evidenced during 2013 in relation to stock which perhaps has been on the market for two years or so, but is otherwise of fair quality.
“So turning to 2014, what is the prognosis for lending against property in the region? Whilst clearly the banks are best placed to comment on the supply of money, it does seem that there should be a general improvement in opportunities during the next twelve months. We anticipate more activity as banks and mortgage service companies continue to exit commercial loan portfolios with a mix of stock and opportunities coming to the market either in co-operation with the borrower or via the LPA Receivership route. The market has largely adjusted to ‘post-recession’ values and thus providing the fundamentals are in place a property lend at this point of the market cycle looks more viable. As ever though, property needs to be considered on a case by case basis and this makes the industry both challenging and rewarding.”