Edinburgh agents are hoping that the warm glow of recovery being felt by the City of London’s financial and business services occupiers will take the chill off its own market. The cool winds of the economic slowdown have blown long enough on the UK’s second financial city, leaving the market in a decidedly frosty state.
According to King Sturge’s data, officelettings were down around 25% in 2005compared with the year before. And Jones Lang LaSalle’s figures for the first quarter of this year show that the number of deals was down 13% compared with the same period last year.
Prime rents are still £3 per sq ft below the last high in 2000, and only three deals of more than 20,000 sq ft were concluded last year. It is a sorry tale. “Usually there might be one 100,000 sq ft deal in a year and three or four of 50,000-60,000 sq ft,” says Alan Robertson, managing director of Jones Lang LaSalle.
So where have all the big occupiers gone? Jokers might suggest Glasgow and, to a certain extent, that is true. But the bullishness of the agents suggests that panic has not gripped them quite yet. Some blame the available stock for the lack of deals. Aside from Castlemore’s 210,000 sq ft Waverley Gate, still vacant 14 months after completion (see box, p159), agents report little grade A space that occupiers could take up. “Last year there wasn’t any good product to go to,” claims Nick White, partner in business space at Knight Frank.
He believes that there are companies that would move if the right product was on offer. He cites the example of lawyer Todds Murray, which was prompted to move into new space at Lochrin Basin, Fountainbridge, thanks, says White, to a proactive developer.
Like the City of London, Edinburgh is dominated by occupiers from the financial and business services sector, and it is this sector that in the past has been a strong indicator of the strength of the market.
Research by Knight Frank and Experian has found a link between the activity in the sector and rental growth. Catherine Penman, head of research at Knight Frank, says there is a “very strong correlation” between Edinburgh prime office rents and projected growth in the financial and business sector within the city.
Any projected growth for financial and business services has therefore got to have a positive effect on the Scottish capital’s office market. Experian forecasts a modest and steady growth (see graph, p159) that will, says Richard Yorke, an associate director, see the creation of 8,000 jobs between 2005 and 2010.
Total requirement
According to Knight Frank, this equates to a total requirement of 1.64m sq ft of office space -a figure that, over the five-year period, averages out at 328,000 sq ft pa. This compares with annual average take-up in the city of around 750,000 sq ft.
Stewart Taylor, director at CB Richard Ellis, says: “Edinburgh’s economic growth has stagnated over the past three years, and evidence shows that there is a direct link to demand for offices. Forecasts are indicating a return to sustained growth from this year, which will emerge as renewed indigenous demand.”
However, JLL’s Robertson warns that Edinburgh has relied too heavily on home-grown companies generating demand. He was one of a group of property people who met Edinburgh council representatives recently to discuss a co-ordinated approach to marketing the city.
“If you look at Edinburgh 10 years ago, it had more head offices than it does now. I don’t think the indigenous occupiers can be relied on in the same way they were in the past,” he says. “In the past few years, non-indigenous occupiers have moved to Edinburgh in a small way and then grown. For example, investment manager Franklin Templeton came here 15 years ago with literally a few people and now occupies 60,000 sq ft. We could get more of these organisations with a better resourced, better thought out marketing campaign.”
Indeed, it is one of these past inward investors that could be the source of a future deal. Financial services provider State Street has announced it wants to double its workforce in the city.
Knight Frank’s White says: “We can put names on 600,000 sq ft worth of demand in Edinburgh at the moment, and that is occupiers seeking more than 20,000 sq ft, predominantly in the city centre.” He says that demand is split almost equally between the serviced office sector, the legal profession, financial services and the public sector.
However, he predicts another quiet year this year, perhaps reflected in the lack of stock completing -around 57,000 sq ft, according to King Sturge’s figures.
Next year will be different for building completions at least, with some 200,000 sq ft set to come on to the market. If the theories are right, then the completions might stimulate some large-scale activity, particularly since much of the new space will be in the Exchange district, so loved by businesses.
“A lot of companies are making a profit,but not that much of a profit. When the market is more bullish, and there is more office product available, then you will see moreactivity,” says White. “If a company sees a rival taking a new building, it motivates them to do the same.”
May is nearly over, traditionally the time for throwing off warm clothes. Let’s hope the market can do the same some time soon.
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Q1 saw the number of deals 13% down on the same period last year, with a 2% drop on the previous quarter Enquiries were down 29% for Q1 compared with the same figure last year Over half the enquiries were for space in the city centre Letting activity in west Edinburgh has been limited in Q1 but, with a diminishing supply of grade A space in the city centre, an increase in activity is anticipated Supply of office units of 10,000-plus sq ft continues to fall Top rent achieved in Q1 was £25 per sq ft, but incentives are still necessary Reduction in grade A stock is expected to lead to rental growth this year Some 8,000 jobs in the business and financial services sector are expected to be created by 2010, equating to 1.64m sq ft of office space |
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Sources: Jones Lang LaSalle, Knight Frank, Experian |
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Castlemore’s 210,000 sq ft Waverley Gate building on Waterloo Place completed more than 14 months ago -and is still empty. There have been very few large-scale lettings in the past 17 months, so is the building a victim of tough market conditions? On paper, it has a great location, close to Waverley Station and St James shopping centre. But Waverley is seen as the tourist station while Haymarket to the west is seen as the business commuters’ station, particularly as it serves the Exchange district -home to many corporate HQs. One agent, who did not want to be named, says: “For years, all the business was done at the Charlotte Square, west end of the city and it’s a big shift to move east. The area has got a bit of stigma, probably wrongly.” Then there is the price. Developer Castlemore is quoting £30 per sq ft when the highest rent last achieved was £29 per sq ft in 2001. Rents peak at £27 per sq ft today. “If it was £25 per sq ft, it would have got more viewings,” says one agent. Hugh Rutherford of joint letting agent Montagu Evans agrees that the market has been tough. “The minimum size we would have considered was 40,000 sq ft, but there wasn’t a letting of that size.” He agrees that there is a perception problem with the east end of the city, citing a “herd mentality” in the west as a factor, but he says things are changing. “The corporates and financial services are more open to look at alternative locations,” says Rutherford, citing lettings to Baillie Gifford at Carlton Gate. But on rent he believes that “for the right organisation and the right deal we will be very competitive”. He adds: “Rents will go through the £30 per sq ft barrier in the next 12-18 months.” For Castlemore and the market, that can’t come too soon. |
