The West Midlands investment market is stalling as funds refuse to buy unless they can have exactly what they want. Adrian Morrison reports
Transactions in the West Midlands investment market were rare last year. Central Birmingham saw fewer than 30, not quite breaching the £600m mark, and these tended to be safe-haven plays. Indeed, if it wasn’t for the drama of vendors’ and buyers’ mismatched price aspirations and the prospect of yet more distressed sales, the market would almost be banal.
However, there is a glimmer of hope that in the first half of this year the region will experience a ripple from London, as opportunities in the capital diminish and investors are increasingly priced out of deals.
“A number of people are focusing only on London and the South East,” says Steve Benson, director with Birmingham property consultant GBR Phoenix Beard. “But we expect to see UK funds widening their search in the first half of this year as they start to get priced out of London.” He warns, however, that “they are very conservative about risk”.
The market has seen a flight to safety, with only the most prime assets being traded and a touch of oversupply of grade-A offices, creating a poor picture for rental growth. Benson adds: “We are seeing the spoiled child syndrome – if funds cannot have exactly what they want then they won’t buy.”
Institutional investors have money and this is filtering through to property. Prudential has a £400m cache following its sale of Green Park in Reading.
In November, German fund Deka bought Direct Line House on Livery street in Birmingham for £22.5m – yield 6.4%. Other foreign institutions, such as SEB, have also been active. IVG, Primerica and Hansa all have requirements for Birmingham.
Ashley Hudson head of Knight Frank’s Birmingham office, says: “Most of the UK retail funds were active in the final quarter of 2011. As soon as the West End and City gets too hot, it will filter down to the big regional cities. Regional office yields will not weaken. They are at 5.75% to 6% and I can only see that rate hardening on the best assets.”
But rarely is the most sought after in plentiful supply – certainly not in a zero capital growth market. Distressed sales and bank divestments will form the lion’s share of opportunities in the first two quarters of 2012.
Ireland’s National Asset Management Agency will continue to release stock throughout the West Midlands, as will British banks. Hudson reckons that many have already written down capital values on investments and are preparing to abandon modest income streams for a clean sheet. Lloyds, for example, has been packaging portfolios of industrial properties.
In contrast to Birmingham’s office market, most of the region’s larger industrial units have let over the last couple of years and there is limited supply over 200,000 sq ft. “I expect to see some more forward funding commitments at the larger end of the industrial market,” says Ned Jones, associate director with DTZ.
Despite the market being distinctly underwhelming, it is perfect for well-capitalised property companies.
Abstract Securities has “fantastic” relations with UK funds, according to one agent, and is well placed to take advantage of distressed sales. Nurton Developments and Moorfield have been bidding through their joint venture; the well-funded Highcross is still active; and Hansteen has been lively on the industrial side. “They will continue to be active buyers and selective sellers,” says GVA senior director Jonathan Hillcox.
But the institutional emphasis on defensive assets, coupled with the release of distressed and often secondary properties, has led to further polarisation between prime and non-prime.
“In the past six months we have seen secondary stock that would have achieved a 10% yield sticking, and bids coming in at 12%,” says Hillcox. “That’s across the board in Coventry, Birmingham, office or industrial.” He adds: “We will see pricing for riskier assets moving out and prime staying where it is.”
The irony, of course, is that the same banks that are divesting stock are not prepared to lend to entrepreneurial property firms. It is a Catch-22 situation.
And there is still around 740,000 sq ft of grade-A offices available in Birmingham city centre, or more than two years’ worth of supply.
“I’m not so sure that the West Midlands is shining a light for rental growth in the same way that Glasgow, Bristol or Manchester is,” says JLL director for capital markets Richard Goodall.
However, he adds: “The fundamentals of the market would not put buyers off. It is just where Birmingham currently sits.”
Top 10 potential H1 2012 deals
Offices: St Philips Point on Cannon Street is in administration and was under offer but fell out of bed in January. Property companies are looking at a price range of £13m to £14m.
Baskerville House on Centenary Square (left) will inevitably see its £55m price tag reduced as Lloyds Bank adjusts to current conditions.
Ballymore’s 2 Cornwall Street went to best bids at the end of January and is rumoured to be under offer at £7m. This will act as an indicator of demand.
Sherbourne House in Coventry (below) has been marketed for Aviva since last August. Agent DTZ is looking to revise the price tag down, which will reflect a yield of 7.5% rather than the original 7.2%
1-3 Colmore Row could come to the market for around £13m in H1. Owner Ballymore has refurbished and may market after a couple more floors are let.
INDUSTRIAL & DISTRIBUTION: Hermes’ Holford Industrial Park, near M6 junction 6, is on the market for £30m. It is regarded as a barometer for larger, multi-let industrial estate demand.Goodman’s 380,000 sq ft Palletforce distribution hub at Centrum West on the A38 in Burton-on-Trent is currently being marketed by Strutt & Parker for offers in excess of £24m.
Segro’s £200m imminent divestment of industrial parks, which is believed to be to a Harbert and Canmoor joint venture and fund manager Ignis Asset Management, includes Kings Norton Business Centre in south Birmingham and Meteor Park in Aston.
LEISURE: Radisson Blu Hotel on Birmingham’s Queensway (above) is being marketed by GVA on behalf of receivers KPMG. Formerly owned by property magnate Stephen Beetham, the building was valued in September 2009 at £30m. Administrators are not quoting a selling price.
MIXED-USE: Lloyds Banking Group’s The Cube on Wharfside Street is now almost fully let. “I can’t see them holding that any longer than they need to,” says GBR Phoenix Beard’s Steve Benson.
