Ready to roll As Cambridge’s busway gets ready to take its first passengers, are developers too optimistic about its potential to raise rents? asks Nadia Elghamry
Cambridge
The locals call it the “misguided bus”, which probably sums up the tortuous, twisty journey that Cambridgeshire’s guided busway has taken to get to its maiden journey on 23 October.
But, in just over a month, the first driver will turn the keyon the £116m project and rev down the road.
Some landlords believe that it will rev up rents in their office buildings as it hurtles past the windows on its way between St Ives and Cambridge.
Endurance Estates is so convinced of the bus scheme’s regenerative powers that it is speculatively constructing two office buildings totalling 40,000 sq ft at its St Ives business park onthe strength of it.
For Endurance Estates director Tim Holmes, the payback will be cashing in on the lofty rental differential of up to £7 per sq ft between his park and Cambridge’s science parks. He believes that, ultimately, the bus could boost local rents of around £17 per sq ft by 10% -although he admits it may be a long road.
This is despite claims by some that cost-conscious occupiers may now head back towards the city as landlords drop rents and offer juicy deals to entice tenants.
“Rents in the science parks are in the late teens, early 20s, and we’ll offer substantial packages,” says Holmes. As an example, he points to a recent letting to City &Guilds, which took more than 4,000 sq ft at St Ives at £17.50 per sq ft, with around 12 months rentfree.
Others in the industry seem surprised at Holmes’ bullishness. “It is a pretty brave move,” says Will Mooney, partner at Jefferson Commercial. He has been involved with the nearby Compass House development,where phase three will not be built without a prelet or presale. “Unless Holmes knows something we don’t, I doubt very much that the guided busway isgoing to do what he wants it to,” he says.
In Cambridge, the market is feeling less fractious, says Mooney. He says that,after seeing a number of deals fall through in the first quarter, he now has more heads of terms out. However, he tempers that by saying: “We’re worried about the dead cat bounce and can take only what is directly in front of us. The business park market has had to adjust to the reality of the times.”
Headline rents might look good but there are some good incentives to go with them. For a 10,000 sq ft office suite, an occupier could drive a deal of £18.50-£19.50 per sq ft, with a five-year unbroken lease and 12 months rentfree, which, according to Mooney is “back to 2001 levels”.
The market has been hit particularly by paralysis inthe international corporate markets, and many of the Japanese and US owners of hi-tech Cambridge firms have pulled the plug on deals.
Large enquiries are few and far between. Nokia has revised its requirement down from 10,000 sq ft to 8,000 sq ft. However, its on-off deal for space at Turnstone’s West Cambridge site seems to be crystallising.
Mike Ayton, director at Juniper Real Estate, says that, so far this year, the market is running at 75% when compared to the long-term average take-up of 400,000 sq ft pa, but only five deals have been for more than10,000 sq ft.
Most chunky demand is now being provided by the public and academic sectors. For example, the NHS, the primary care trust and the strategic health authority are all seeking 10,000 sq ft each, says Ayton.
Traditional Cambridge occupiers are quieter, says Ayton’s co-director Jamie Green. “They have been working on their cash burn-up rate – not that many are profitable at the moment. Keeping real estate costs under control is key,” he says.
Ayton points out that there has not been a new building in the city centre for well over 15 years. “It is difficult to see any development in Cambridge city centre for the next three years. It’s taken 15 years up to now – why should that change overnight?” he says.
Development sites, such as that for the 35,000 sq ft Academy House, need to physically accommodate the guided busway before building can commence. Agents are also keeping a close eye on 3Crown’s House on Hills Road, where owner Royal London could refurbish the formercourt building. In addition, Ashwell’s £880m CB1 site is still in the pipeline. Ashwell declined to speak to EG, but agents point to the site’s circa £3m rent roll on leases running up to 2015, and believe nobody will be looking to break ground in the near future.
Norwich
Secondhand space has come flooding back onto to the Norwich office market, which caused supply to skyrocket to a 10-year high by the end of June. Indeed, as the second quarter closed, secondhand space accounted for 85% of total availability.
Developers are keeping their heads down.These include Targetfollow, which hasplans for a 500,000 sq ft mixed-use scheme at Harford Place, where ASDA has taken a prelet for 60,000 sq ft, and the 200,000 sq ft Dukes Wharf. At Harford Place, the developer says that it is in talks with planners with the intention of being on site next year,subject to funding.
Potential occupiers have also come forward for Dukes Wharf, says Targetfollow’s development director Julian Wells, but he warns: “People are not moving quickly. But we own the site, so we control the situation.”
For the time being, Ian Fox, managing director at Targetfollow, says that it will be micromanaging its portfolio. “We’re renegotiating a lot of contracts, looking for cost savings and ways to keep the service costs down for tenants.”
Norwich’s retail vacancy rate is half the national average of 10%, says Carol Cooperof local chartered surveyor Francis Darrah. Behind that figure, however, are what she calls some “flexible” deals. The big chunks of capital to help with fit-out have disappeared, but landlords are agreeing terms for 10-year leases with a fixed review.
“There’s also those taking short-term leases of three,fouror fiveyears in the hope that things will have picked by then and they’ll get the unit back,”says Cooper.
Headline rents on the prime pitch of Gentleman’s Walk are around £190 per sq ft zone A, down from a peak of £220 per sq ft.
It will take until beyond the end of the year for the market to come back, says Cooper. Norwich will see more temporary occupiers setting up shop, signing 12-month leases with three to four-monthterms certain.
The four-year-old Chapelfield shopping centre seems to be finally coming of age. It has now secured Apple, which has taken space on the centre’s upper level.Charlie Griffiths, asset manager at the centre, says the centre has seen a 5% year-on-year increase in footfall to June this year, with an almost identical boost to sales performance.
The centre is “bucking the national average” he says, although he declined to give specifics on Chapelfield’s vacancy rate. CSC announced in its interim figures that it was making a £0.2m cash deposit to ensure its interest in the centre wouldnot be breached.
Suffolk
Office rents for good-quality secondhand space rose 11% in the first six months of the year, as almostevery deal completed to June was for this type of space.
While that might have helped the secondhand market, Ipswich’s office occupiers have been “non aspirational” in the past, says Chris Moody, head of commercial at Savills Ipswich. “They’ve shown limited demand for prestigious new or grade A accommodation so, during the downturn, they have less need to downsize.”
But for developers with new space on their hands, it is a very different tale. Prime rents dropped by a quarter as take-up of these units ceased.
Office take-up also fell a quarter to 49,500 sq ft, and would have looked distinctly sicklyhad it not been for a 20,000 sq ft-plus deal signed by Suffolk Mental Health Partnership NHS Trust at Mariner House.
Savills has taken half of Targetfollow’s 14,000 sq ft, 40 Princes Street scheme. The developer says it also has a letting in solicitors’ hands for a five-year deal to an existing occupier in the town thatis looking to expand at what it calls “reasonably sensible terms, although not as good as 18 months ago”.
The supply of industrial property is on the increase as several buildings initially earmarked for residential development have been leton short-term deals while the housing market recovers, says Savills’ Moody.
However, the scope for new space is slim. Take-up is down 40%which, according to Moody, has been made worse by “a collapse in world trade”.
Bidwells’ new head takes a longer-term view
Like most, Bidwells’ commercial property business has taken a bashing. It is now Patrick McMahon’s job to turn its fortunes round. McMahon, who is currently head of commercial, takes over the top job when senior partner James Buxton hands over the reins in January.
“It’s a difficult time and one of the most difficult tasks has been getting on top of the costs,” says McMahon. “We’ve been through reducing the amount of paperclips we use, we’ve got everyone driving diesel cars and we’ve had to reduce our wage costs. The large part of cost cutting has now been done and it’s time to look to the future.
“I expect the market to return in three to four years’ time, so we are looking at strategic land for residential development to take through the planning process.”
He adds: “Returns for land will be dramatic, and the clever money should be starting to position itself for the upsurge. However, this is for only the rich and the brave, being an equity play, as there’s no income with land.” As a result, the decision to pursue this model was not taken lightly. “We are in survival mode but we can just about do it when others cannot,” he says.
McMahon adds that rural and planning are still going strong. Residential scored its best four months for 10 years with £45m worth of transactions, although McMahon believes this is a blip from pent-up demand being met in one go. Commercial is adapting as the size of deals shrink (see table below).
That said, McMahon believes the occupational market still has some way to fall. “Moving is expensive and all occupiers need to do is say they are going to move and the existing landlord says ‘please don’t’.”
The commercial investment market has seen some eye-watering prices being paid for small lots.
There are signs this is filtering through to the larger deals. For example, Kett House on Station Road, let on a long lease to Eversheds, fetched £9.75m – equivalent to a 8.4% yield when IM Properties bought it in April. McMahon believes it could fetch closer to 7.75% today, which would give it a value of £10.58m.
That said, little capital is finding its way through fund managers’ hands, he says, as investors stay wary of retail funds.
Pension funds are becoming active again but on only very secure, single-let properties. McMahon feels some may be overestimating risks because businesses that have not failed are unlikely to do so now.
As your granny would say: look after the pennies and the pounds will look after themselves. More Cambridge agencies seem to be seeing granny’s wisdom and are settling for smaller deals. While take-up has fallen, there has been a huge leap in the number of deals signed.
Bidwells is at the top yet again. But despite maintaining its quota of deals, the square footage is half that of last year. Savills regains the silver position. Local player Jefferson Commercial, which was second last year, nearly doubled its deals but, in the end, was pipped to third place.
Cambridge agents’ league table
As your granny would say: look after the pennies and the pounds will look after themselves. More Cambridge agencies seem to be seeing granny’s wisdom and are settling for smaller deals. While take-up has fallen, there has been a huge leap in the number of deals signed.
Bidwells is at the top yet again. But despite maintaining its quota of deals, the square footage is half that of last year. Savills regains the silver position. Local player Jefferson Commercial, which was second last year, nearly doubled its deals but, in the end, was pipped to third place.
| Agent | Total space (sq ft) | No of deals | |
| 1 | Bidwells Property Consultants | 125,495.00 | 34 |
| 2 | Savills | 91,377.00 | 50 |
| 3 | Cheffins | 44,742.00 | 17 |
| 4 | Jeffersons Commercial | 43,295.00 | 42 |
| 5 | Lambert Smith Hampton | 27,096.00 | 3 |
| 6 | DTZ | 22,769.00 | 2 |
| 7 | CB Richard Ellis | 18,245.00 | 2 |
| 8 | Januarys | 14,599.00 | 2 |
| 9 | Colliers CRE | 13,245.00 | 4 |
| 10 | Carter Jonas | 6,247.00 | 4 |
The table covers Cambridge for the period 01/07/2008-30/06/2009. It uses data collated in the EGi Deals Database. Both occupational sales and lettings are included (not investment sales). The table refers to agents acting for the lessor/vendor, not the lessee/purchaser. Joint agency deals are related to both agents.
