Bristol is high on the shopping list of cash-rich investors squeezed out of London by foreign competition, but the South West city has few wares to display in its shop window and that is forcing prices up and yields down.
The recent sale of The Paragon to Lothbury Property Trust achieved a 5.9% yield, marking the first time Bristol office yields had fallen below 6% since the recession. It’s not a one off – Delancey was effectively gazumped on a deal on Portwall Place, with the new buyer pushing the yield down nearly a point (see box).
In a market with limited supply, it is hard to call this a trend – yields on recent sales have been in the teens and only two other major city-centre deals in the past year have been south of 7% – but The Paragon and Portwall show the intensity of demand for prime buildings.
“There would have been a lot of activity, but there just isn’t the stock,” says JLL’s Oliver Payne.
Bristol has much in its favour: two new speculative office buildings are under way, office take-up of 224,000 sq ft in the first quarter bettered the five-year quarterly average of 177,000 sq ft, according to JLL, and there is fevered talk of big corporates relocating from London in search of lower overheads and a better quality of life.
The journey from Bristol to London is readily commutable. The city routinely tops polls as the best UK city to live in and it has a vocal mayor who is making sure the city is on the map – whether Bristolians like what he has to say is another matter
Demand for Bristolian property is largely from domestic institutions; although the acquisition by York Town partners and Kuwaiti investors of building 2620 at Aztec West for £19m, offering a 7.6% yield, shows some overseas investors also have the city in their sights.
Investors are under pressure to convert their cash into property and they are window shopping in Bristol. JLL estimates there is £7 of capital chasing every £1 of available supply in the city.
“Within Bristol and the South West we’ve done over £125m of deals this year and I can only think of a couple of instances where the purchaser required debt to purchase,” says Knight Frank partner Steve Oades. “They may choose to gear up after the event but to complete a deal, cash is king.”
All this means the yield level set by The Paragon is likely to be breached as soon as Bristol has a grade-A building that someone is prepared to sell.
“If we had a brand-spanking-new building on a 10-year lease, that would be 5.75%,” says Ian Lambert of Hartnell Taylor Cook, agent on all the recent big deals in Bristol.
Bristol’s record low yield was 4.75%, set in 2007, but no one is betting that will be achieved again any time soon.
Portwall Place
This 162,000 sq ft office building is one of the prime developments in the city centre. It was sold to BlackRock for £51.6m in December 2013 offering a yield of 6.9%, having been under offer to Delancey at a yield of around 7.75%.
The deal was an insolvency sale following the collapse of the Anglo Irish Bank, which acquired the building for £60m from developer Deeley Freed after it was completed in 2008.
At the time, it was Bristol’s biggest-ever funding deal.
Portwall Place, with an average unexpired lease term of 10 years and with 75% of income secured to Beachcroft, was marketed at £53m by vendors the Irish Bank Resolution Corporation and took 18 months to sell. Agents believe the building would be scooped up at a higher price now.
“If Portwall Place came back to the market now, we could see that yield cut by at least half a point,” says Steve Oades at Knight Frank.
The Paragon
The name says it all. This is the kind of property investors are hoping for in Bristol: relatively new (built in 2009) grade-A office space, fully let to quality tenants, including EY, Thrings and Mercer, on rents of £26.50 to £27.50 per sq ft, with an average unexpired lease term of around six years to the first lease break.
There is also a Tesco Express on the ground floor.
Invesco Real Estate sold the 75,000 sq ft building to Lothbury Property Trust in March for £29.5m. The 5.9% yield was a post-recession low for the city and set what agents hope is a new benchmark.
Invesco had acquired the building in 2011 for £26.5m, offering a 6.6% yield.
Shed yields drop
While The Paragon deal saw city-centre office yields hit the psychologically important 5.9%, yields under 6% were also being established on some industrial property close
to Bristol’s expanding port at Avonmouth.
SEGRO and Moorfield Logistics Property Partnership recently sold two warehouses to NFU Mutual for £34.5m, a 5.75% yield.
The two sheds, totalling 326,500 sq ft, were built in 2007 and are let to GKN Aerospace until 2036.
