For speculative development, it is not just developers that need to be bold. The funders need to be convinced, too. Joel Hawkins, managing director of Bell Hammer, believes the evidence that institutional funders of big office schemes have become more confident in 2013 is beyond argument.
“At the beginning of the year, we had four funds we knew would back our developments,” he says. “Now we have 14.”
Bell Hammer is already one of the leading speculative office developers in the M25 and Thames Valley areas, which are two of the first regional markets to get up a head of speculative development steam in the latest cycle.
Hawkins was one of the few to take the plunge three to four years ago, when most developers were holding fire. The results of that early plunge are three schemes now finished: the Stanza Building in Uxbridge, where Nexen took 80,000 sq ft this summer; 1 Forbury Place in Reading, which Bell Hammer developed with backing from Hermes and has just finished with 77,000 sq ft available; and the major refurbishment of Tor in Maidenhead with 67,000 sq ft.
All these buildings are evidence that the regional office market is showing real signs of coming out of the doldrums.
Most of the big agents are heralding the recovery in the market with more than the hesitant optimism that has been the hallmark of the last two years. Savills’ latest regional office market report showed a fall in supply and a rise in interest from investors in all the key cities, plus a prediction of an 11% rise in take-up by the end of this year.
Importantly, there is also mounting evidence of the return of speculative building in the regions, although the fact that this is not more widespread underlines the caution that remains after the uncertainty of the past five years.
So while the recovery of the regions is providing one reason for increased investor interest in offices, it is striking that another factor is simply that high London prices are pushing investors to look for value elsewhere. Is there no end to the influence of London on the UK property market as a whole?
Simon Knight, partner at Montagu Evans and a specialist in offices in the South East, is among those highlighting this point. “People have started to look out of town because they would like to buy in London but can’t afford it,” he says.
The reasons are familiar. A huge weight of foreign investment has pushed up London prices to levels that many developers find hard to justify in investment terms. London provides safety and capital gain, but it costs a lot to get access and the potential regional returns are encouraging investment elsewhere.
Knight agrees that a lot of the initial non-London office development seems to be in an arc of traditionally strong office towns around the capital.
He says the current hotspots include Staines, where there are several schemes under speculative development. These include Strata in Bridge Street, which will provide 90,000 sq ft over three floors and will be completed next May. Montagu Evans is joint agent with Knight Frank and the guide rent will in the mid-£30s per sq ft.
Others are Flow – formerly Burgan House – on The Causeway, where Rockspring funded two recently completed buildings, one of 40,000 sq ft and one of 20,000 sq ft; Rivergate West, 20 Kingston Road, was recently bought by Boultby Land for £4.7m and will provide 45,000 sq ft over five floors; and Lotus Park, The Causeway, where L&G has planning permission for a back-to-frame development of an existing building to provide 66,000 sq ft. Construction has already begun and should be completed by the end of 2014.
Further afield, Savills’ head of office agency, Jeremy Bates, points to Leeds, Manchester, Edinburgh, Bristol (see panel left), Cardiff and Birmingham as among the cities that are attracting institutional investment “that can’t find a home in London”.
But it is “not just about weight of money”, says Bates. “We have never gone through such a long period of no development, so we’ve got ageing stock. Tenants that might have stayed where they were a couple of years ago are now indicating that they must move on.”
What will be important in any forthcoming speculative schemes, says Bates, is that they must meet modern standards on technology and sustainability.
“Buildings must never be an obstruction to technology or sustainable working,” he says. “I think we have now reached the stage where buildings in good broadband areas will succeed and those not in them will not.”
Bristol
Bristol is one of the regional cities that is starting speculative office development. November 2014 should see the completion of Salmon Harvester’s 2 Glass Wharf, on the city’s Temple Quay Central, which will provide nearly 100,000 sq ft of new office space.
Elsewhere in Bristol, Skanska is putting up 61,000 sq ft of office space at 66 Queen Square. It has demolished on the site and the next phase is piling and basement excavation. Completion is scheduled for December 2014, says Wates, chief contractor on the project.
So are these two the first of a flurry of Bristol speculative offices? Richard Price, partner at Alder King and agent on both schemes (jointly with JLL on the Skanska project), says: “I suspect the rest of the market will wait and see how these two go.”
Cambridge
The big regional cities may be the natural targets for investors looking outside London for office investments, but there are smaller places that are also showing signs of life.
These include some of the big university towns, such as Cambridge, where Brookgate has a 25-acre office-led development next to the railway station.
Brookgate managing director Sven Topel says Cambridge is “a small but strong place”, partly because of institutions such as the university and Addenbrooke’s Hospital.
Brookgate’s office developments include a series of buildings along Station Road, a mixture of prelets and speculative schemes. Among them is 135,000 sq ft of space at 1 Station Square, which is currently under offer for a fund to develop speculatively. Further up the road, at 22 Station Road, Tesco Pension Fund agreed in August to fund 65,000
sq ft of space in a building which is prelet to Mott MacDonald and Birketts.
In December last year, Brookgate officially opened the Microsoft Research prelet at 21 Station Road. And at 50 and 60 Station Road, it is hoping for planning permission for 130,000 sq ft of offices.
Topel says he is confident about the schemes partly because of dwindling supply in Cambridge, “which has created a supply/demand imbalance”.
Elsewhere in Cambridge, in November DevSec signed a 42,000 sq ft prelet at Cambridge Science Park with Japanese pharmaceutical company Takeda. Takeda is already a tenant on the park and the new building is expected to be completed by the
middle of 2015.
