Ben Cooke looks at the market optimism that is driving speculative office development in the Thames Valley and questions whether the demand for space can continue
Looking for somewhere to take a punt on a speculative office scheme? A number of towns in Berkshire and the Thames Valley, particularly Staines, Maidenhead and Reading, have looked good bets in recent months as rents and take-up continue to rise.
Several funders have taken the plunge, evidenced by the fact that there was more than 800,000 sq ft of speculative office space under construction in the Thames Valley and Berkshire in the second quarter of this year, the highest since the corresponding period in 2009. So is there an appetite for more?
Market optimism is being fuelled by a dramatic increase in take-up in 2013. In the Thames Valley this rose 26% in the first half of this year compared with the same period in 2012, although there are signs Q2 was slower. In addition, vacant office space has reduced by about 13% in the past year.
Meanwhile, rent-free incentives for occupants are being scaled down – previously, tenants may have been offered 18 months rent free on a five-year term; now it’s likely to be just 12 months.
“There is clearly an improving sentiment in the market,” says Campbell Gordon partner Duncan Campbell. “If you talk to agents, some are saying they have never been as busy – there are occupiers planning for significant growth and embryonic companies positioning for growth.”
He also points to the range of industry sectors looking for accommodation as further evidence of improving market conditions, which is no doubt a good thing because TMT sector take-up has declined this year.
“It’s more wide-based,” Campbell adds. “You’ve got the tech sector and the pharmaceutical sector – pharma is now as important as the tech sector – there’s also business services. The hat is not hung on one particular market.”
But is this market optimism enough to encourage further speculative office development? “There are towns where the market dynamic is right,” says Strutt & Parker national markets office agency head Ed Smith.
In Reading and Maidenhead rents are running at £30 per sq ft, and some agents expect them to rise. Another positive sign is that space has been letting up in the recent wave of speculative development. For example, Rockspring and Bell Hammer announced in July this year that they had let The Stanza Building in Uxbridge, west London – which was completed in November 2012 – to Nexen.
There is still an appetite among funders to put cash into speculative development – something of a rarity in the current economic climate but naturally firms are particular about where they see the best opportunities.
When Rock Spring committed to its four speculative office developments in the Thames Valley three years ago, rents had fallen to around £25 per sq ft, but now it is projecting rents of £32 per sq ft.
“We would commit to more speculative development in the right locations – lots of funds see it as an area of rental growth,” says Rockspring partner Neil Shegog.
So, which locations are looking the most attractive at the moment? Shegog names Reading, Staines and Uxbridge.
Indeed, the first half of 2013 has seen a dramatic increase in the number of funders looking to invest in speculative office development in Berkshire and the Thames Valley. Bell Hammer founder Joel Hawkins says: “There’s been a massive change in sentiment. In January, we had four funders interested in speculative office development, now we have 15.”
However all this good news comes with a warning not to rush in with development. Shegog says: “There could be a big supply response so the investment market has to be cautious as it may get carried away on supply.”
When Rock Spring was buying land for its speculative developments three years ago, land was cheaper but, with land prices rising, Shegog predicts more focus on refurbishments. He adds that car parking remains a key requirement of occupiers and that many of the newer schemes have poor car parking ratios, which would hold limited appeal for prospective tenants.
Nonetheless, Jones Lang La Salle south east office agency team head James Finnis says occupiers will “pay a premium to get a grade A building and there are a number of funds keen to get in the market – private equity, in particular, is keen on refurbishments”.
Hawkins echoes this. “Four years ago, most speculative development had no justification but, in the past 24 months, there has been enough justification – there is increased demand and limited supply, though the current demand is only for a premium product.”
MEPC shows how to make the grade at milton park
Property developer MEPC is speculatively developing around 55,000 sq ft of office space its Milton Park site 10 miles south of Oxford.
The 2.5m sq ft of existing stock is 96% let and the new space will be split between two buildings which will complete in 2014. MEPC is funding the development from its cash reserves. Commercial director Andrew Barlow says the firm is developing speculatively because of “strong demand in the Oxfordshire economy”.
This demand is coming from the science, research, technology and publishing sectors, according to Barlow: “There is very little grade-A stock in the Thames Valley, so there is a squeeze on supply.”
He says the development was given further impetus by the fact that Milton Park was awarded Enterprise Zone status by the government in 2011, under which businesses enjoy discounted business rates.
The top rent at Milton Park stands at £23.50 per sq ft. However, MEPC is targeting rents of £24.50 per sq ft.
“We set it at that level so we’ll be competitive with our Thames Valley neighbours,” says Barlow.
Campbell Gordon partner Duncan Campbell says MEPC made the right decision to speculatively develop at Milton Park.
He says: “It was not long ago that some experts were predicting the demise of the office park, but they have been proven wrong – certainly in the Thames Valley.
“The fundamental drivers behind the success of business parks remain and if anything have strengthened – great access, parking, large floor plates and quality of accommodation, and great onsite amenities.”
