June 1, 2016
As momentum wanes following a strong 2015 in the Bristol investment market, Andy Coyne examines why prices are rising and the effect of office-to-resi schemes.
Could the lull in the Bristol investment market be the result of the uncertainty surrounding the Brexit referendum, or simply the money men taking a breather after a frantic 2015?
Probably a bit of both.
Some £385m was invested in the Bristol office market last year. This was the highest level since 2006 and well above the 10-year average of £210m, according to Savills.
It was always going to be difficult to retain that momentum, although some deals that started last year spilled over into this – notably the sale of Bridgewater House at Finzels Reach by Cubex Land and Palmer Capital to an overseas investor for £56.3m, reflecting a net initial yield of 5.35%.
Funds may be restocking their wallets or simply biding their time waiting for the right opportunity.
Prices are also high because of the lack of available stock to buy. The next new office scheme of any note on the horizon is Aurora at Finzels Reach, a 95,530 sq ft scheme not due to complete until next year.
The situation has not been helped by a surge of applications to convert offices into residential schemes – the highest number outside London, it is widely quoted – partly because Bristol is expecting 10% population growth over the next 10 years.
Tom Newman, an investment manager at Schroders, managing assets in the Bristol area for the Schroder Real Estate Investment Trust, says: “The general feeling is there is good demand out there, but it completely outstrips supply.
“If you can get hold of product that can be rented out it would be snapped up. It is a great market to be investing in.”
Newman’s point, of course, is that reduced supply and high demand equates to higher rents – already around £30 per sq ft for grade-A space, with a widely held belief that they will be at £35 per sq ft by 2020.
In the meantime, Schroders is among those concentrating on maximising value within its own assets. It is spending £2.5m refurbishing Augustine’s Courtyard (formerly Orchard Court), a warehouse-style office building on the edge of trendy Clifton.
“With no available stock coming into the market it is time to be patient and to get headline rents,” says Newman.
Ian Lambert, investment partner at Hartnell Taylor Cook, describes the run-up to the end of 2015 as “one of the most frenetic I have witnessed, with a huge amount of investment transactions”.
He adds: “2016 has been almost subdued, with uncertainty posed by Brexit, and even the dreaded ‘redemption’ word being whispered by some funds.”
But no one is suggesting the Bristol office investment market has fallen off a cliff. Deals are still being done.
CBRE Global Investment Partners has had a busy spring, acquiring the aforementioned Aurora office development via its Palmer Capital Development Fund III joint venture for an undisclosed sum and buying the 52,728 sq ft 2 College Square in Harbourside from M&G Real Estate for just under £22.8m, on behalf of a client.
And the funds are not having it all their own way. In volume terms, some 21% of Bristol office market investment last year came from overseas money, according to Savills, and an increasing number of the buyers were private investors.
It is a trend that has carried on into this year with the Bridgewater House acquisition. The buyer was widely acknowledged to be an un-named Russian private investor.
Richard Howell, investment director at Bilfinger GVA, says: “A lot of UK institutions are slightly nervous on the bigger lots – £50m is a big deal for Bristol – and private investors are filling that gap.
“We are seeing a lot of investment from overseas and a lot of it is pure private wealth.”
It might be argued that uncertainty caused by the in/out EU referendum decision is being used as an excuse to mask a market slowdown but that uncertainty is real.
John Benson, head of investment at locally-based agent Alder King, said: “Any sort of uncertainty creates hesitancy. We have got a number of private clients who are sitting on their hands until the Brexit decision is made.”
The investment market in Bristol is finely balanced – a bit like the Brexit outcome you might say.
If investment in Bristol offices has been red hot, the same certainly cannot be said of industrial property.
Hartnell Taylor Cook’s Ian Lambert describes 2015 as a relatively quiet year for the industrial sector, with few deals coming to the market.
Lack of stock continues to drive the market with good-quality assets being chased by investors.
Industrial assets are an attractive option as prime rents, long stuck on £6.50 per sq ft, are now quoted at between £7.50 and £8.50 per sq ft.
Things could soon hot up. The Range is taking more than 1.1m sq ft for its new regional distribution centre HQ at Central Park and property owner Stoford Developments is seeking to fund the building at £90m, representing a net initial yield of 5%.
Author: Andy Coyne, EGi