Report shows office investment slowdown in Leeds

John Burger, associate director of investment market place at Colliers CRE, Leeds
T: 0113 200 1825
john.burger@collierscre.co.uk

A new report into the Leeds office investment market has concluded that transactions during the first half of 2008 totalled circa £106m – this is 18.5% down on the five year average of £130 m. The report also highlights that although the current total transactional sum is similar to that seen in the first half of 2007, the number of transactions is down by circa 40% on 2007 and 60% on 2006.

There were only four major transactions completing in the first half of the year, with the most pertinent being the sale of Broad Gate by Capital & Counties to Highcross for circa £70m, this exchanged unconditionally in June 2008. Although the property is primarily vacant, the purchase is rumoured to reflect an equivalent yield of circa 7.25%.

Other major transactions include the sale of GE Capital’s 1 Park Lane to Credit Suisse (Euro Real) in January 2008 for circa £22m, an initial yield of 6.25%. This was the only institutional acquisition in the first half of 2008 with the remainder made up by property companies or private buyers.

John Burger comments: “Whilst the H1 transactional total has mirrored that of 2007, 66% of the total is accountable to the Broad Gate deal and in reality there has been limited appetite for offices over the past six months. Of the relevant demand, most has been from private investors and property companies, mainly those that have been inactive over the past few years and have not been exposed to falling property values.”

Institutional investors continue to be net sellers still driven by redemptions in unitised funds, however, many of these have now been deferred which has tempered the supply. Colliers CRE expect institutional sales to continue through the remainder of the year, albeit in a more controlled fashion to some of the fire sales witnessed at the end of 2007.

The research estimates that almost £160m worth of office investment stock in Leeds has been available over the past six months and has either not sold or been withdrawn.

Burger explains: “For example, Standard Life’s Sovereign House, let to Addleshaw Goddard for a further nine years was brought to the market at £25.2m in January 2008 and was later withdrawn after failing to achieve an acceptable price.

“Bridgewater Place, the 235,000 sq ft office tower, has also been rumoured to be available over the past year but has still failed to find a credible buyer. This is now suggested to be worth around £100m.”

Whilst the office investment market continues to slow, the occupational market has remained relatively resilient with prime rents hitting £26 per sq ft (previously £25 per sq ft).

“Leeds currently has the lowest prime rent of all the six major provincial office centres in the UK. The dynamics of the current supply pipeline also look positive, although there is sometimes the incorrect perception that Leeds is oversupplied. There is only 405,000 sq ft of new Grade A accommodation due to complete in 2008 in three new schemes, with only a further 260,600 sq ft scheduled to complete in 2009, although none of this will be new build” continues Burger.

In the short term Colliers CRE expect that the upward swing in swap rates from the start of the year and the continued reticence from financial institutions to lend money indicates that it is unlikely there will be any easing in the funding markets this year and this could well continue into next. Prices are still continuing to adjust to reflect the cost and difficulty of obtaining finance, albeit at a much slower rate than the real cost of borrowing.

With financing and refinancing remaining difficult and very limited institutional demand, Colliers CRE believe there is a window of opportunity for well financed or cash rich investors to capitalise on the limited competition in the market, especially where there are forced sellers, although investors should focus on solid fundamentals.

“Unlike past downturns, the market seems to have reacted fairly swiftly and although some vendor’s expectations are unrealistic, the market is not at a standstill as there are still transactions completing albeit at a much lower level in terms of lot size and volume” concludes Burger.

Going forward Colliers CRE expect the next tranche of stock to emanate from highly geared private investors and property companies unable to refinance at realistic levels or struggling to uphold equity covenants.

The wide ranging experience of the Investment Market Place team in Leeds, coupled with detailed, research-backed market knowledge, allows it to provide high quality advice to clients across all business sectors, locations and property types. To speak to someone regarding this report in more detail contact John Burger in the Colliers CRE Leeds office on 0113 200 1800.