The Bristol office investment market is playing a waiting game. The first half of the year saw a slight softening in the market, with prime stock holding its value but secondary stock starting to lose some of its appeal.
A number of buildings on the market are being seen as tests for where the market will move next.
John Sisman, head of investment at Knight Frank, says: “Hopefully, over the summer, there will be a soft landing, and people will look in the autumn and have a much clearer idea of where the market is going.”
Indeed, Ian Lambert, partner at local agent Hartnall Taylor Cook, says: “I’ve heard some institutions are going to sit tight until after the summer.”
Bristol, like many UK cities around the country, has been enjoying a robust investment market. Initial yields for prime stock have been squeezed as a limited supply of space has forced rental growth. Market consensus says that this is unlikely to change.
“You can point to some fantastic growth in headline rents in a relatively short period of time, and the funds came in on the back of that,” says Roger Chubb, partner at GVA Grimley.
The two most notable of those recent deals was Invista’s purchase of 1 George Square and Rockspring’s acquisition of Tower Wharf. Invista paid £29.5m at a yield of 4.95% for the 68,500 sq ft building, which is let to solicitor Clarke Wilmot, and Rockspring paid £32m at a yield of 5.13% for the 70,000 sq ft building, which is part let to Britannia Building Society.
Investors are looking for rental growth. With interest rates rising, is the market robust enough to deliver?
Chubb points to reports that predict a drop in overall investment performance nationally, but believes this will fall only 5-7% in the regional office markets, “which isn’t necessarily a low performance compared with how it has been”.
The fall is already affecting the market. The gap between prime and secondary office yields is beginning to widen, and investors are becoming choosier about what they perceive to be prime, although there is continuing robust demand for good, well-let stock. Secondary yields are around 6%, and market consensus is that they will move out a little more.
Deals are taking longer to finalise. Lambert points to two lots of buildings that are on the market at Bristol Business Park and Aztec West. “The Aztec Centre is under offer, but it seems to have taken longer to find a buyer. Three months ago, the buildings at Bristol Business Park would have been snapped up.”
It is not just the recent rises in interest rates that are biting the Bristol market. The dearth of supply that has pushed up rents will come to an end in around 18 months’ time. Chubb believes that if developers then start finding it difficult to let buildings, it is inevitable that initial yields will soften.
However, agents say there are still opportunities for shrewd investors prepared to seek out assets to which value can be added.
Sisman advises investors to look for buildings with good parking, let on low rents and with lease regears ahead. He highlights the area around Bristol Alliance’s Cabot Circus retail-led, mixed-use development, which is now under construction. The area was previously viewed as a secondary location, but now that the scale of the work being carried out is clear, its potential as an office location is coming to the fore.
In addition, office development around the city centre, where developers Crest Nicholson, Castlemore and Cubex all have schemes under way, guarantees future investment stock.
“The developers will probably decide to build them out and get them partially let before selling on, but there is a chance that any one of them could decide to come to the market,” says Chubb.
And with one agent at least believing that the market is still undervalued in terms of rental levels, then it is likely that Bristol will get that soft landing should the market suffer further.
Industrial market is slower but opportunities can still be expected
As with the office sector, there has been a modest cooling in the industrial investment market around Bristol.
But with big-gun shed developers such as Gazeley, ProLogis, St Modwen and Goodman all firmly ensconced in the area, there are definitely opportunities ahead.
The Sevensides area is the focus of large-scale development, and St Modwen has already sold an 18,750 sq ft unit it had prelet. Royal Liver paid £1.93m, reflecting a yield of 5.7%
“Should you be buying sheds in Bristol? The answer is yes,” says Roger Chubb, partner at GVA Grimley, pointing to the fact that much of the space in the pipeline will already have a tenant signed up.
“There won’t be much speculative building,” explains Chubb. “Supply is limited by the number of buildings that can be produced at any one time, and there is much less supply than in the office market.”
Prime yields are between 5.5% and 5.75%, and 6.5% for secondary and multilet stock. Agents predict that this will not change.
There is also a market for assets that can be worked.
South Liberty Lane and Brook Gate, at Ashton Vale in south Bristol, for example, is a 17-acre site with 334,000 sq ft of built stock, some of which is ripe for refurbishment. It is being brought to the market with a price-tag of £21.75m, reflecting a yield of 6.5%.
Ian Lambert, partner with Hartnell Taylor Cook, which is acting for the vendor, believes that the £65 per sq ft capital value is on the low side and is, unsurprisingly, confident of finding a buyer.
