The West Midlands occupier market is on vitamins – it must be. What else could explain the frantic can’t-sit-still activity?
Any time now, a £52.7m sale-and-leaseback deal will be agreed in Solihull. It follows a £51.5m sale-and-leaseback in Nuneaton for health food supplement business Holland & Barrett.
These are not the first, and won’t be the last, of a rash of sale-and-leasebacks as the West Midlands corporate occupiers surge into the market, their blood infused with the financial equivalent of vitamin C.
To many of them, it’s a no-brainer – almost a no-thinker – inspired by the red-hot market for good, regional office investments. Junk your old expensive-to-run and inefficient offices, get something spanking new and cheap to operate, and cut your rent. And if your timing is good and your covenant impressive, perhaps turn a serious profit along the way?
“This is just good news all the way,” says one overjoyed participant in the latest sale-and-leaseback deals. It’s hard to disagree.
Construction and building services group Interserve is behind the Solihull deal. Institutional investors are said to figure high on its shortlist of potential buy-and-leasebackers, and a deal is due imminently.
Down the road in Nuneaton, vitamin king Holland & Barrett is also at work on a £51.5m sale-and-leaseback of its UK HQ and distribution centres in the Midlands.
The retailer’s 40,000 sq ft HQ at Samuel Ryder House is to be extended by 48,400 sq ft as part of a sale-and-leaseback deal with Coventry-based Deeley Group. Simultaneously, two warehouses at Burton-upon-Trent’s Centrium 100 business park are being sold to Axa Real Estate for £34.2m. The 433,000 sq ft portfolio changed hands for a net initial yield of 4.35%.
Holland & Barrett has signed a 30-year leaseback on the properties subject to RPI-linked rent reviews.
Richard Walsh, director at Colliers International, has been advising the company. He says the deal was all but inevitable, given Holland & Barrett’s needs and requirements.
“The alternative was to write a cheque for design-and-build,” he says. “They are retailers, not property people, never wanting to be sold term holdings of property. They want to sell vitamins, not run a property portfolio.”
Walsh adds: “They came to us in March – and the deal is now done. They don’t mess around. They already knew what they wanted – more space, a sale-and-leaseback, so there was no need for us to compare the financials with design-and-build. They had already decided.”
Extending the building made sense – even if the resulting design will not please everyone, including perhaps future occupiers.
“The extension is very much for them,” says Walsh. “It’s an odd shop, an odd building. There would be a question of how that would work for a new owner, if they ever wanted to leave.”
The consensus among observers is that H&B did the right thing – perhaps the only thing – it could do to secure new space without losing its existing staff. It ends an on-off requirement that has periodically fascinated agents.
Andrew Venables, director at Bilfinger GVA, says: “There’s nothing much available to occupy within 10 miles of Nuneaton, and on design-and-build sites there would be a mismatch between rent and the build costs. The rent might have been more than they were prepared to pay.
“Their timing is good for a finance deal, which is what this essentially is. They are well placed because of the strength of the investment market.”
Interserve’s move is more ambitious. The construction and support services group plans to relocate staff from its West Bromwich regional HQ and from existing offices in Erdington, Aldridge, Dudley and Redditch. The new office at Elmdon Trading Estate, Solihull, will total 145,000 sq ft, compared with around 30,000 sq ft at its existing regional office, Intersection House in West Bromwich.
The new building will be ready for occupation in early 2018 – and comes as Interserve absorbs the Initial Services business, based in Dudley.
Tim Haywood, Interserve’s group finance director and head of sustainability, says: “The new building is an opportunity to bring all our business divisions together in one place.
“This new hub will be more cost-effective than the less efficient buildings our people will be vacating. The co-location of staff will enable our operations and support functions to work better together, while the site’s location close to major transport links will help us to reduce travel costs and emissions.”
According to John Knowles, director at Colliers and an adviser to Interserve, the firm quickly ruled out a Holland & Barrett-type rebuild of an existing office. “None of the existing offices were on a site suitable for extending,” he says. “And the new freehold site they acquired for about £6m gave them the opportunity for sale-and-leaseback. We are in discussions with funding partners off a rent of £23.50 per sq ft, and we’re looking at a yield of better than 5%.
“There has been plenty of interest and we’re at what feels like the eighty-third round of bidding.”
Knowles say the building is not just a rationalisation and a potential money-spinner – it is also an advertisement for the company’s style and capacities.
“They need a new HQ that works for the staff – and overall it’s about the same total floorspace as the six buildings it replaces, except those old buildings were staggeringly inefficient,” he says. “The new building gives them flexibility, too. But it is also an exemplar. It will look cool and show off the latest products and techniques. It’s not fair to call it a show home – because it will work – but it is a showpiece.”
New route for M5 site?
Solihull won Interserve because it had a site at the right price and an airport on its doorstep. But what of the West Bromwich site it is vacating?
Bilfinger GVA’s Andrew Venables tips a hotel for the M5 junction 1 motorway site. He says: “Never say never to offices, but the town has lots of lower-grade secondhand suites, and the end value of new development would be too low.”
Knight Frank’s Birmingham-based head of offices, Jamie Phillips, has his finger on the West Brom pulse.
“It’s hard to get a more prominent site,” he says. “The big blue building on the M5. And West Brom can cope with development of a scale, if the occupiers are lined up. Refurbishment could work, but the top rent is £13.50-£14 per sq ft. That said, the area has plenty of blue-chip occupiers, and it would make a good call centre.”
Phillips says Neptune Developments is quoting £17.50 per sq ft for the Interchange development by Wolverhampton station, so “rents have the potential to grow”.
Sandwell council seems to think leisure might also be the answer.
Steve Eling, deputy council leader, says: “The move had been agreed and was under way before we were made aware of it. A hotel could always be a possibility.”
Brum city centre revs up
Channel 4 is the latest potential relocator to Birmingham in a year that could see city centre take-up nudge 1m sq ft.
The TV channel’s move – with Manchester also in the running – is far from certain, but comes soon after Jacobs Engineering took 22,000 sq ft at Nurton’s 2 Colmore Square. Proximity to the new HS2 high-speed rail head office at Two Snowhill was a key factor, as it has been for many relocators.
Meanwhile, indigenous occupiers are also stepping up their property market activity. Prominent among them is law firm Irwin Mitchell, which is mulling a 50,000 sq ft requirement, one of about 2m sq ft of active enquiries. If even half of them translate to hard deals, that is a mighty change of gear for Birmingham’s occupational scene. According to Knight Frank, second-quarter take-up in the city centre was 520,000 sq ft, a mighty 400% leap on the first quarter.
Jonathan Ottewell, associate director at Savills, says the supply of prime, core, grade-A office space is likely to reach a 10-year low in 2017. “Rents are rising,” he says. “Today it tops £32-33 per sq ft, but any occupier looking 12-18 months ahead will have to think of £33 per sq ft and above.
