Bristol Investment: Office market out of stock

When Skanska put its 61,000 sq ft, brand new, 66 Queen Square office building on the market late last year it was inevitable that it would draw attention from the wealth of money looking to buy in the UK’s regional cities.

Blue-chip accountancy firm KPMG has prelet 52,000 sq ft in the building for a record rent for the city of £28.50 per sq ft and there is speculation that the remaining upper floors may smash that.

Agents talk of around £400m of bids targeting the circa £32m building, so it is no surprise that it is under offer – to Aviva – at a yield rumoured to be less than 5%.

It is a great story for the Bristol market, a reflection, some say, of its status and prospects. But for all those who were the underbidders there is a problem: what else is there to buy in the Bristol office market?

“It is nice to have that amount of money looking at the market. If only we had product,” says Oliver Paine, JLL’s director of capital markets in Bristol.

And Bilfinger GVA investment director Richard Howell agrees: “Demand for prime stock is substantial, all the major funds would like to come to Bristol, mainly because of its occupational story.”

That occupational story is certainly compelling: three speculative office schemes – 66 Queen Square being one – started during the recession and all have found occupiers, there is nothing else under construction and further rental growth is predicted (see p92).

The lack of stock for occupiers and investors has come about for two reasons. First, very little development during the lean years of recession and, second, much of the existing office stock is already in long-term ownership by institutions such as M&G.

“Who is going to sell?” asks Nick Allan, senior director of investment and development consultancy at DTZ. “Developers? Property companies
taking profit? Funds are unlikely to sell given the majority of their cash
positions, maybe overseas buyers cashing in, but all of those investors are looking to buy.”

When asked which buildings, if any, might come to market, Cubex’s Bridgewater House was the one most hotly tipped.

The 118,000 sq ft building is part of the Finzels Reach mixed-use development which was bought out of administration two years ago by the Palmer Capital-backed Cubex. It was built speculatively and completed in 2011 but struggled to let initially. It is now partly let and energy provider EDF has a conditional agreement to take the remainder of the space.

You would expect Cubex director Gavin Bridge to be coy when asked if Bridgewater House will be put up for sale, but he isn’t. It will come to the market in Q3 with a price tag of around £55m, he says, adding: “It is a big lot size for Bristol.”

And one that will no doubt attract attention from institutions and overseas investors. Bridge is aware of the appetite for investment stock and says he would love to have other product to put to the market, but development has to happen first. He is not the first to suggest that this might be where the opportunities lie for those looking to park money in the city.

Certainly the market fundamentals seem to support more offices. Lambert Smith Hampton’s Bristol office head, Darren Sheward, says: “If you are looking to deploy in the regions and want quality, to get returns you might have to sit a little higher up the risk curve.”

Cubex has submitted plans for a 95,000 sq ft office building at Finzels Reach and could be in the market for development funding. It is just one of several potential development funding opportunities (see panel) – it is a question of whether investors will bite.

“Speculative funding is a big question mark. It is the right time to be speculatively funding and if you wait two years you have probably missed the market,” says Allan.

In the meantime, investors are turning their attention to good grade-B office stock. Rents are growing and opportunities are being snapped up. For example, the 109,000 sq ft Spectrum building at the bottom of the M32 is under offer above its asking price, according to Allan.

Deals such as these will keep the market ticking over and agents are predicting investment volumes will match last year’s. However, the hope is that Bristol’s next big story will be speculative funding of an office development, which should keep the leasing agents happy too.

Sites to watch for: Development funding/acquisition

Bank Place

Flattened site owned by Carlyle Group with an existing consent for around 230,000 sq ft of offices, but has potential for mixed-use development with riverfront residential. Seen as one of the best development opportunities in the city.

Finzels Reach

Cubex has submitted plans for a 95,000 sq ft office building and could well be in the market for development funding.

Waterfront Quay

Originally earmarked for a performance venue as part of the millennium celebrations, which never got built, this is a gap site that is rumoured to be coming to the market. Offers potential for public/private partnership with Bristol city council to develop a mix of uses: hotel and as much as 200,000 sq ft of leisure/offices.

St Mary-le-Port

Site has a mix of buildings with various leases and has been tipped for regeneration potential on and off for the past 10-15 years. Rumoured to be under offer. Would be a complex scheme to bring forward but a prominent site.

Author: Stacey Meadwell, Estates Gazette