Opportunity knocks in Western Corridor offices as investment market has lift off

By Paul Norman - Wednesday, September 13, 2017 15:00

Office take-up remains subdued in the Western Corridor, thanks to a lack of large deals, but a looming hole in the pipeline of stock plus structural changes in the occupier market is creating opportunity, JLL said today as it unveiled a wide-ranging report on the key market. Investment wise JLL said the market is on course to comfortably beat last year’s record figure of £2.6bn, with the “bookend” markets of Hammersmith and Reading as well as business parks seeing particularly fevered activity driven by a widening investor pool. CoStar News takes an exclusive look at the key findings.

At a slick presentation this morning at the Ham Yard Hotel in Soho which saw members of JLL’s South East team teleported into the event via the “JLL transporter” direct from Landid and Brockton’s Thames Tower in Reading, the agent said take-up in the first half of 2017 had hit 848,000 sq ft and taking into account deals that have subsequently taken place or are expected it is now predicting full year take up of 1.75m sq ft, still significantly below the 10-year average of 2.2m sq ft.

Notable has been the lack of large scale corporate lettings – undoubtedly impacted by large business nervousness around the EU referendum vote – with the largest letting so far this year being WeWork’s lease of 55,000 sq ft of flexible space at U+I and Aberdeen Standard Investments’ 12 Hammersmith Grove.

JLL said leasing activity in H1 has been stronger in the Thames Valley, with 550,000 sq ft let, compared to West London, with 297,000 sq ft.

Reading continues to be the most active market, with 222,000 sq ft of take-up in H1, driven JLL said by improved connectivity and amenity, alongside the delivery of new supply.

The TMT sector has been the most active, accounting for 37% of all take up across the Western Corridor in H1, followed by the services and manufacturing sectors accounting for 34% and 17% respectively.

JLL director South East office agency James Finnis said there had been an upturn in large-scale requirements in the market in recent weeks but these were unlikely to materialise as transactions until 2018 to 2019 and nervousness around the Brexit negotiations and outcome would continue to be a factor.

Within this there has been significant lettings activity at the sub 50,000 sq ft end of the market and Finnis picked out a handful of standout lettings that he said each point to trends across the region that investors and developers should reflect on. These were:

• Birds Eye’s lease of 37,000 sq ft at One New Square at Bedfont Lakes. Finnis said this pointed to the popularity of fitted or grey space with corporates seeking to avoid major capex spends on new buildings.

• INC Research’s lease of 49,000 sq ft at Harbert Management Corporation and XLB’s Pinehurst 1 Farnborough Business Park – Finnis said this points to the trend of mergers and acquisitions activity among traditional Western Corridor tenants – in this case a life sciences group - driving activity.

• Becton Dickinson’s consolidation into 60,000 sq ft at Winnersh Triangle pointed to a desire for “quality not quantity” across the market.

• Verifone’s lease of 21,000 sq ft at 3 Roundwood, Stockley Park points to occupiers seeking increased flexibility with a five-year break agreed. JLL said the flexible terms had no impact on Carval Investors and Chester’s ability to exit the asset subsequently.

• WeWork’s previously mentioned letting at 12 Hammersmith Grove points to the increased prevalence of co-working space, something JLL expects to continue with developers advised to consider setting aside space in buildings for this.

• Fiserv’s lease of 28,000 sq ft at Landid/Brockton’s The Porter Building in Slough, tipped yesterday by CoStar News - Finnis said the deal pointed to the importance of the arrival of the Elizabeth Line in driving occupier decisions

Finnis said of these standout deals four had been at business parks, illustrating that if the amenity and offer is right reports of the death of the business park look misguided.

Overall supply levels have moved up over the past 12 months across the Western Corridor, with 10.3m sq ft of space now available, up from 8m sq ft a year ago. This equates to a vacancy rate of 12.5%, up from 9.6%.

The rise has been prompted by a spate of development completions, with 1.9m sq ft of speculative completions in West London over the past year, most notably at White City Place (280,000 sq ft), The Charter Building in Uxbridge (240,000 sq ft) and The Bower at Stockley Park (140,000 sq ft).

But following these completions, the level of speculative space under construction has dropped back to 1.4m sq ft, down from 3.1m sq ft in mid-2016.

Finnis said there was a looming “hole in the development pipeline” in 2019/2020 which will lead to a sustained period of net absorption leaving occupiers with limited choice and likely leading to a return of prelets.

In the face of this Finnis said developers “cannot afford to be vanilla”, with flexibility and amenity likely to be essential as well as a shortening of the development process.

Despite slower economic growth and below average take-up over the past 12 months, prime rents have continued to grow. Average prime rents in the Western Corridor have grown by 3.7% year-on-year to stand at £35.82 per sq ft at end H1-2017.

Notwithstanding slight increases in headline rents, JLL said rent free periods edged upward during H1 and now stand at 30 months and 23 months’ rent free on a 10 year term in the Thames Valley and West London respectively. Incentive periods vary across the market dependent on micro location and quality of stock.

But Finnis said a key issue making central London occupiers look further afield as major infrastructure works including the Elizabeth Line complete would be total occupancy costs which by 2019 JLL predicts will be £178 a foot in the West End, £107 in the City, against £54 a foot in Slough and £41 a foot in Bracknell.

Finnis has deducted that given the Elizabeth Line will take travellers from Slough to Bond Street in 32 minutes this equates to a cost of approx. £3.90 per sq ft per minute.

Investment market

An ebullient Angus Minford, director national investment, was able to update on the booming Western Corridor office investment market following a week of completed mega deals across the region, including Oaktree’s sale of a major business park portfolio and Aviva’s acquisition of Ealing Gateway.

The overall Western Corridor 2017 figure was £632m for H1 but recent transactions have taken this to over £1.75bn in early Q3 meaning JLL is confidently predicting output will beat last year’s record £2.6bn of activity. Standout recent transactions have included listed Singaporean investor Frasers Centrepoints’s acquisition of a number of Oaktree and Patrizia’s business parks in the region and Aviva’s acquisition of Ealing Gateway from TH Real Estate

Minford said a key theme had been the strength of overseas investor appetite with CPPIB in for a share of Milton Park, TPG in for the Arlington business park portfolio and Frasers in for the Oaktree/Patrizia assets.

Minford said: “62% of the transactions have been carried out this year by overseas investors.”

There is a widening pool of investors with the key buyers the UK funds, with this mainly being those with segregated mandates, overseas investors, local authorities, private equity buyers and also parties buying with alternative uses in mind.

The problem remains sellers. There has been increasing activity from corporate occupiers, perhaps in response to the changing accountancy regime, but there is not enough quality stock in the market for motivated buyers, Minford argued.

Prime yields remained stable during H1 at 5.25% in West London and 5.50% in the Thames Valley.

However, there has subsequently been a hardening of yields as competition intensifies on sought after prime product in Greater London, which Minford described now as a sub 5% market.

There is a strong focus on multilet west London buildings with “softer rents” as well as business parks.

Minford pointed to major transactions for eight business parks explaining that overseas investors looking for quantum and income diversity were showing a preference for business parks in comparison with other opportunities such as shopping centres or central London prime assets.

A key challenge now revolves around the valuation of tomorrow’s buildings with their shorter lease lengths and more difficult to assess covenants.

Ben Burston, head of UK offices and capital markets research at JLL, said: “As technology continues to reshape business, shortening product lifecycles and increasing the pace of change it will also reshape occupier demand. This will put increasing emphasis on flexible space to facilitate interaction and new product development.”

Claire Racine, associate director, Upstream Sustinability, focused on the emerging trend of “wellness”.

“Be creative and holistic in your approach to health and wellbeing. Relatively simple, intelligent uses of existing infrastructure can create social benefits. Measure the health and financial outcomes of your investments to demonstrate value to investors and apply to future projects. A holistic health and wellbeing strategy can help you enhance reputation, future-proof assets and capture cost-saving opportunities.” 


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