End of English preserve

Overseas investors have been waking up to the returns that UK property can provide. Stacey Meadwell surveys the fortunes of major centres in 1999 Recent reports suggest that, when it comes to funding schemes such as the Tate Modern art gallery on London’s South Bank, UK investors are reserved about opening their coffers. More traditional schemes such as the refurbishment of the Royal Opera House in Covent Garden are far more up the Englishman’s street, leaving the foreign investor to plug the gaps. While the recently opened Royal Opera House was refurbished and remodelled at a cost of £214m, with £78.5m coming from Lottery grants and over £100m from 20,000 private and corporate sponsors, the £134m Tate Modern has received £56.2m from National Lottery funds, but was forced to look to the USwhen domestic contributors were not forthcoming. Enticed by a year of low interest rates and signs of rental growth, most of the UK’s regional centres were witness to an influx of money from the Continent. As the tables over the next six pages show, a wide variety of investors have been keen to cash in on the good returns that UK property currently offers. Meanwhile, attracting retail investment has proved difficult in some cities as investors wait to see how the performance of major new schemes is likely to affect their returns. Top 10 Belfast investors in 1999 The Celtic tiger moved north last year Private investor £22.0m MEPC £20.0m Private Investor £15.3m Private Investor £14.8m Blanca Developments £10.4m Private Investor £9.5m Private Investor £6.1m Private Investor £5.7m Private Investor £5.0m Bridge Park Developments £4.5m Source: Lisney Belfast The effect of devolution on the investment market in Northern Ireland cannot be underestimated. Over the past few years, while the peace deal has been under negotiation, interest in the province has risen. Agents believe the new power-sharing initiative will have further implications for the investment market. “Securing lasting peace changes the perception of Northern Ireland and means we can tap into people who wouldn’t normally look at Northern Ireland,” explains Alistair Dunn of Lisney. However, he points out, devolution will bring planning and infrastructure issues back into the control of local authorities, which will make them more proactive and directly accountable to the electorate. “The planning system has almost ground to a halt,” says Dunn. “The Department of the Environment currently acts as adviser and decision-maker, but now, planning decisions will be made on a local level. “We are also way behind with our structural plans, which acts as a disincentive to investors.” Putting Ireland’s recent political developments aside, the biggest trend over the past 18 months has been the influx of southern Irish money, according to Paddy Brennan of Lambert Smith Hampton. He explains: “The Republic’s economy has reached peak levels, and returns on investments are not as attractive as opportunities in the North which offer better value for money. “Major economic investment in the North, on the back of lasting peace, offers tremendous long-term prospects for significant rental growth in all sectors.” Prospects of Northern Ireland joining the EMU within five years and cheaper stamp duty are also incentives for southern-based Irish investors. While Guy Hollis of Richard Ellis Gunne agrees that Republic institutions are showing increased interest, he says that opportunities to invest are being hampered slightly by a shortage of high-quality product. LSH’s Brennan agrees: “Demand continues to outstrip supply due to the lack of quality opportunities available in the marketplace.” However, adds Gunne: “Recent developments highlight the continuing popularity of Belfast’s commercial property market as a profitable investment. “The office sector, in particular, is experiencing a sustained period of growth and confidence – evidence of this is the major speculative office scheme under construction at Lanyon Place.” Brennan is equally upbeat: “It could be argued that property has become, first, more expensive and, second, more difficult to buy because of increasing supply and demand influences. I believe that, either way, it is healthy for the market as it may create more liquidity and diversification.” He concludes: “There are no signs that the market will slow down over the next 12 months. The more home-grown wealth that can be created on the back of the optimistic political climate, the more private money that will be made available to invest in the commercial property investment market.” Top 10 Belfast investment deals in 1999 The private investor dominates the Northern Irish market more so than anywhere else in the UK Property Sector Seller Buyer Price Net initial yield Richmond Centre, Derry Shopping centre IM Properties Finance UK-based private investor £22m 7.66% Belfast Mail Centre, Hightown Ind Est, Mallusk Industrial/distribution Post Office Property Holdings Private investor £15.26m 6.65% Flagship Shopping Centre, Bangor Shopping centre Bangor Flagship Developments Sarcon Diamond £14.8m 7.3% Northcott Shopping Centre, Newton Abbey Retail Lochinver Blanca Developments £10.35m 5.5% Abbey National call centre, Belfast Office Finbrook Investments Private trust (Irish) £10.2m 6.26% Mallusk Park Industrial Estate, Mallusk Industrial Private investor (Irish) Belfast Office Properties £9.5m 8.27% River House, High Street, Belfast Office/retail Friends Provident Private investor (Irish) £6.1m 10.69% Newforge Lane, Belfast Offices Private investor Private investor £5.7m 8.16% Arnott House, 12-16 Bridge Street, Belfast Retail/office Zenith Property Developments Private investor £5m 5.27% Larne Link Retail Park, Ballymena Retail warehouse Legal & General Assurance Society Bridge Park Developments /private investor £4.5m 5.64% Source: Lambert Smith Hampton Birmingham Investors fighting over the limited number of Birmingham city-centre office investment opportunities will be breathing a sigh of relief because Birmingham city council appears to be about to relax its planning guidelines. “Birmingham city council wants to move forward,” says Richard Goodall of King Sturge. “The scarcity of good-quality stock in the city centre has put pressure on the older stock and there is a new planning regime to encourage redevelopment and refurbishment.” Justin Parker of DTZ Debenham Thorpe agrees: “Proposed relaxation of the restrictive planning regime in Birmingham city centre should revitalise the traditional office core.” However, the historic lack of activity is creating an imbalance in supply and demand, according to Richard Ellis St Quintin’s Steve Benson, who forecasts rental growth across all sectors. CB Hillier Parker’s Rupert Young is equally upbeat. He says: “Funds should buy good-quality city-centre office investment now, because Birmingham will be £30 per sq ft within three years.” German investors are showing an interest in Birmingham’s potential. “We are increasingly seeing German funds competing against UK funds for product in Birmingham city centre – Colmore Row would be a very good example,” explains Jonathan Hillcox of Jones Lang LaSalle. “Yet, two to three years ago, competition for such product would have been among UK funds only. “Competition will become increasingly fierce as more international funds look to invest.” Indeed, German bank CGi is rumoured to be funding Richardson Developments’ 18,580m2 (200,000 sq ft) speculative office scheme at 1 Colmore Square. Equally, retail rents have been attracting investor interest, according to Goodall. He describes the pressure on rents in the city’s prime areas as “phenomenal”. “If I had a retail block to sell, it would go very well. There are a lot of reasons to buy: Birmingham has about 2,000 sq ft of retail space per head of population, compared with other cities which have, on average, 4,000 sq ft.” But not all agents agree. GVA Grimley’s Hapri Sehmi comments: “The retail sector has been subdued because investors expect it to be outperformed by offices and industrial combined. The perception is that rental growth within the retail sector has peaked.” REStQ’s Benson believes that retail investment is on hold because schemes such as Birmingham Alliance’s Martineau Place and the new Bull Ring, which are projected to complete in 2001 and 2003 respectively, will “redefine the boundaries of the retail market within the city centre”. However, CBHP’s Young has a slightly different view. He explains: “There is very little retail investment activity in Birmingham city centre at present as owners are witnessing good rental growth and are holding on to their stock to see what effect the Martineau and Bullring schemes, proposed by the Birmingham Alliance, have. Top 10 Birmingham investor commitments in 1999 Henderson and LandSec form Birmingham Alliance Birmingham Alliance £800m – anticipated end value Argent £295m – including buildings already sold and those planned at Brindleyplace Richardson £220m – anticipated end Developments value of developments Birmingham Mailbox £100m – anticipated end value Wisskirchen £60.5m Despa £47.0m Hermes £41.5m Scottish Widows £37.0m Equitable Life £28.0m Godfrey Bilton £26.0m Source: GVA Grimley/Richard Ellis St Quintin Top 10 Birmingham investment deals in 1999 Offices attracted the most interest, with German funds increasingly competing with UKcompanies Property Sector Seller Buyer Price Net initial yield Colmore Gate, Colmore Row Offices Church Commissioners Despa £47m 7.6% Saltley Business Park, Saltley Industrial A&J Mucklow Hermes £41.5m 7.5% Cornwall Court, Cornwall Street Offices MEPC Corstan Holdings £32m Confidential 120 Edmund Street Offices Brixton Estate Wisskirchen £28.5m 7.8% Monkspath Industrial Estate, Solihull Industrial Standard Life Equitable Life £28m 6.7% Broadway, Edgbaston Offices/retail Pillar Godfrey Bilton £26m (apportioned) Confidential Richardson Parkway, Wednesbury Distribution Richardson Developments Scottish Widows £25.5m 6.43% The Charters, New Street Offices/retail Hill Samuel Undisclosed £18.5m (estimate) Confidential Merlin Park, Castle Bromwich Distribution Richardson Developments Scottish Widows £11.75m 6.75% Former Bank of England Building, Temple Row Offices/retail Pilton Land Henderson £10m 6.98% Source: GVA Grimley/Richard Ellis St Quintin Top 10 Cardiff investors in 1999 Delancey spent £25m on Millennium Plaza Delancey Estates £25.0m Equitable Life £21.0m Britannia £11.7m Land Securities £11.7m Mars Pension Fund £6.2m RGD Thomas £5.8m Fendlake £4.2m Cardiff city council £4.0m Argyll £3.1m PMG Properties £3.0m Source: King Sturge Cardiff Few cities in the UK can claim to have been in the spotlight in 1999 more than Cardiff. Not only was the city chosen as the home for the new Welsh Assembly but it also hosted the 1999 Rugby World Cup and opened a £800m barrage that will give Cardiff a 202.4ha (500 acre) freshwater bay. Consequently, there is strong investor interest in the leisure sector. But all this time in the spotlight has taken its toll on the market. “There have been at least 12 new outlets opened in the last 12 months or so in the city centre and there is the possibility of even more than this opening in the next 12-18 months,” explains Peter Graham of Stephenson & Alexander. “The inevitability is a softening of property yields, although only slightly in my view. I would put prime hotel yields in the city centre at 8%, and prime pub and city-centre leisure schemes let to national operators at 7%.” Graham highlights reports that put turnover figures for Cardiff city-centre pubs among the highest in the UK, which could explain the rush of operators wanting a foothold. Demand for retail investment in the Welsh capital has also been strong. “Significant rental growth is being achieved and Cardiff is identified as a hot spot for further rental growth on the prime retail pitch,” says DTZ Debenham Thorpe’s Daniel Griffiths. A new benchmark zone A rent of £2,583 per m2 (£240 per sq ft) was set towards the end of last year, says Griffiths. Tim Vallance of Churston Heard says that investors are climbing over each other to secure property. “A property on Queen Street – the prime retail pitch – was marketed at £6.5m last summer and subsequently attracted the interest of around 15 major institutions,” he says. “The sale quickly went to best offer and the property is under offer at around £1m ahead of asking price.” The reason for such strong interest, according to Vallance, is the “general consensus that zone A rents in the town are too low”. Aled Evans of King Sturge agrees: “The interest was largely as a result of the hike in zone A rents from a previous high of £175 per sq ft to £235 per sq ft.” Prime yields reflect the expected rental growth, which Rob Jones of Knight Frank puts at 4.5-5%. “Prime yields are likely to remain at around this level as the core begins to strengthen along Queen Street, particularly with the construction of the new Sainsbury’s unit opposite the Capitol shopping centre,” he says. The Capitol shopping centre itself is going through a phase of redevelopment. According to DTZ’s Griffiths, £15m is being spent on the centre, which will target high-fashion retailers. “This is resulting in increased investor and retail demand for this end of Queen Street and, again, illustrates confidence in the Cardiff market,” he adds. Top 10 Cardiff investment deals in 1999 Leisure was in the spotlight, but office deals still dominated the market Property Sector Seller Buyer Price Net initial yield Millennium Plaza Leisure Brunswick Holdings Delancey Estates £25m 7.4% Cardiff Bay Retail Park (50% share) Retail Schroders Equitable Life £21m 5.5% Knox Court, Fitzalan Road Offices Scottish Life Britannia £11.7m 7% St David’s Shopping Centre freehold Retail Cardiff city council Land Securities £11.7m n/a The Orchards, Llanishen Offices Chester Properties Mars Pension Fund £6.15m 9.7% Heron House, Newport Road Offices Unilever Fendlake £4.14m 7.8% Cardiff Ice House Leisure Compco Holdings Cardiff city council £4m n/a Windsor House Offices John Lister, private investor Argyll £3.1m 8% Admiral House Offices Templar Holdings PMG Properties £3m n/a Bevan House, Cardiff Business Park Offices In-house clients of Knight Frank Irish investor £2.2m 7.7% Deals expected to complete as EG goes to press: 90-92 Queen Street, which Norwich Union has agreed to buy for around £7.5m, reflecting a yield below 4% The Castlebridge office scheme near the Millennium Stadium, which is under offer to an unknown party for £7.25m, reflecting a yield of 8.3% Source: King Sturge Glasgow The biggest test for investors in Glasgow’s retail sector will be how the footfalls fare now that its two new retail schemes are complete. In town, Buchanan Galleries, a 55,740m2 (600,000 sq ft) shopping centre, opened last year and, out of town, a similar-sized Braehead shopping centre also opened its doors. “With Braehead and Buchanan Galleries shopping centres both opening in 1999, how will this affect locations such as the St Enoch Centre and Argyle Street?” ponders King Sturge’s Chris McFarlane. Agents believe it will be a few months before they have an answer. “To date, the opening of Braehead has not significantly detracted from the footfall within St Enoch Centre and Buchanan Galleries within the city centre,” comments Lucy Green of CB Hillier Parker. “But it will be interesting to see if this situation continues.” She points out that demand for retail investments remains strong, particularly around Buchanan Street with “yields consolidating at 4-4.5% for prime stock”. Alasdair Ramsay of Drivers Jonas says that investors are confident about the future. “There is investment demand for key locations such as Sauchiehall Street, in anticipation of further rental growth.” Indeed, rents in Sauchiehall Street rose from £1,076 per m2 to £1,507 per m2 (£100 per sq ft to £140 per sq ft) in 1999, according to Douglas Wilson of Jones Lang LaSalle. Glasgow’s office sector has also enjoyed a bumper 1999, and agents are making positive predictions for 2000. Green comments: “The foreign investors have driven the office investment market during the course of 1999, accounting for over 75% of all deals transacted. Clearly, there has been significant improvement in the yield that funds are prepared to pay for prime accommodation and this has been driven mainly by a steady rise in rental growth.” However, Bill Binnie of GVA Grimley believes the city is dogged by supply problems. “Unlike Edinburgh, Glasgow continually suffers from an imbalance between supply and demand in the office sector,” he says. “This is holding back the potential for rental growth, thereby restricting investment demand.” However, Richard Ellis St Quintin’s Stuart Webster believes that it is a good time for investors. He points out that office rents have risen over the past year because of a lack of grade-A stock and, with little coming through, such growth is expected to continue. “It is an excellent time for investors to buy, with rents substantially lower than, say, Edinburgh, off yields which are much more attractive, and with more growth to come in an economy which is almost twice the size of Edinburgh,” he adds. King Sturge’s Mcfarlane, too, believes that Glasgow is in a strong position. “With Edinburgh stealing the investment limelight at the moment, I believe now is a good time to focus on Glasgow because it will undoubtedly come right back into vogue with a bang – when the market least expects it.” Top 10 Glasgow investors 1999 Investors anticipate rising rents Hermes c£47.0m iii-Fonds £38.4m Resolution Properties – joint venture between Resolution and Teachers Insurance and Annuities £37.6m Matrix Securities £28.0m Private investors £19.5m Hanserinvest £16.6m Royal London Asset Management £16.5m n/a £16.0m Chester Properties £14.8m Private Irish investor £11.0m Source: Ryden Top 10 Glasgow investment deals in 1999 Glasgow is fighting back against Edinburgh’s traditional domination of investors’ demand Property Sector Seller Buyer Price Net initial yield Forge Shopping Centre, Gallowgate Retail Chesterfield Properties (dissolved) Resolution Properties £37.55m 7.2% Atlantic Quay, Broomielaw Offices Bellhouse & Joseph/Pillar Matrix Securities £28.27m 6.75% SFG Portfolio £75m, All SFG Portfolio Private Irish investor of which £25m is Glasgow property Not disclosed Guildhall, 25-46 Queen Street Offices/retail Royal Bank of Scotland Princess Square Development £22m 7.47% Dalmore House, 310 St Vincent Street Offices Burford Group Watermark (Ecosse) £19.5m 7.19% Princes House, 50 West Campbell Street Offices Teesland Group Hansalnvest Gmbh £16.6m 6.16% Tontine House, 8 Gordon Street Offices/retail Burford Preston Royal London Mutual Insurance Society £16.5m 5.15% The Waterfront retail park, Greenock Retail Scottish Metropolitan Town Centre Securities £15.75m 6.25% Cowcaddens Road Offices CALA Properties Immobilien Institut Gmbh £13.35m 7.1% 250 St Vincent Street Offices BBC Pension Fund Trust Private Irish investor £11m 6.8% Kirkstane House, 139 St Vincent Street Offices Moorfield Estates NFU Mutual Life £10.35m 6.45% Source: Ryden Leeds When it comes to foreign investors, Leeds has been stealing the show over the past year. The top 10 investors and deals list shows that overseas money has played a big part, although Jones Lang LaSalle’s Alistair Russell points out that the foreign investors had the upper hand while interest rates were low. “This competitive advantage slipped as interest rates moved out and, in a more balanced market, the institutions could more readily compete,” he says of the situation towards the end of 1999. Jonathan Hull of CB Hillier Parker says: “Leeds represents a growing metropolitan city and is perceived as a growing market. Investors are looking at long-term rental growth compared with other northern cities.” He compares Yorkshire’s capital with South East hot spots, such as Stockley Park. “Rents at Stockley are around £30 per sq ft, so you have to question how much rental growth there could be compared to Leeds’ rents of £20 per sq ft.” Like most of the other cities in this survey, Leeds has a perceived shortage of investment stock. GVA Grimley’s Jonathan Peasgood comments: “Two years ago, no one wanted to know about offices in Leeds. Since then, high take-up has led to increased rents and keen interest from investors. “There is now a shortage of new space, despite having 140,000m2 of outstanding planning consents – the equivalent of about three years’ supply.” But agents are predicting that there will be cranes on the horizon this year. “2000 should see the recommencement of meaningful speculative development sparked by the supply-demand imbalance in the office and industrial sectors,” predicts David Nicholls of Knight Frank. He points out that the industrial sector is particularly hard hit because of the lack of sites for new development. “A number of traditional industrial sites are being developed for higher-value uses, increasing pressure on land.” Peasgood agrees: “Demand continues to outstrip supply and a shortage of sites will remain a problem until the outcome of the Leeds UDP review – although the opening of the new A1-M1 link road has released some land.” One of the biggest investors in the city is the Universities Superannuation Scheme, which has assembled a site for retail redevelopment in the heart of Leeds’ shopping core incorporating Trinity and Burton Arcades. “Altogether, the new city-centre redevelopment represents a major vote of confidence in the future of retail in Leeds. The market is seeing rental levels of up to £200 per sq ft in prime areas and further increases may be on the cards,” says Peasgood. Donaldsons’ Keith Hardman agrees. He adds that, while the city does lag behind the likes of Newcastle, Birmingham and Manchester in terms of retail rents, this could be to its advantage. He explains: “The impact of the forthcoming rating revaluation will be less significant in Leeds compared with other regional centres.” Top 10 Leeds investors in 1999 Leeds is viewed as a growing market Credit Suisse Asset Management £32.7m Bastionen £24.1m USS £17.0m Royal & SunAlliance £16.9m Private investor £13.1m Private Irish investor £9.0m Tilman Asset Management £6.8m Tonex Properties £5.9m Danmerc £4.7m Bass Pensions £4.7m Source: Jones Lang LaSalle Top 10 Leeds investment deals in 1999 Foreign investors took advantage of low interest rates, but UK firms are back in the market Property Sector Seller Buyer Price Net initial yield Princes Exchange Offices Teesland Credit Suisse £32.7m 6.7% 1 Park Row Offices NatWest Bastionen £24m 6.56% Leeds 27 Business Park, Bruntcliffe Way Industrial Norwich Union Royal & SunAlliance £16.9m 7.25% Yorkshire Bank retail portfolio Sale and leaseback NAG Private investor £13.1m 7.6% 33-38 Briggate Retail MEPC USS £10.78m 4.25% 2 Sovereign Street Offices Yorkshire Water Irish investor £9m 7% Lisbon House, Wellington Street Offices Teesland Tilman Asset Management £6.84m 6.8% 39-41 Briggate Retail Celexa USS £6.2m 4.5% * 7-9 Park Square Offices Town Centre Securities Tonex Properties £5.88m 7.97% Blenheim House, West Street Offices Helical Bar Danmerc £4.73m 7.19% Source: Jones Lang LaSalle * Unconfirmed at time of going to press Manchester When asked to highlight Manchester’s prominent investment trends, agents in the city were unable to agree. The city centre, out of town and south Manchester were each singled out by different agents as areas of particularly strong investment activity. Likewise, there were disagreements about which type of investor had been most prominent. “Demand has been led by institutional investors such as insurance companies, pension funds and overseas investors, with less involvement from private investors in the second half of the year as increases in long-term finance rates make them less competitive,” comments DTZ Debenham Thorpe’s Mike Mitchell. However, Mark Rawstron of GVA Grimley says that, of the £125m worth of office trading, 60% comprised private purchasers. But he adds: “Again, in the office sector it has also been the year of the overseas buyer taking advantage of historically low borrowing rates and ability to self-finance given gilt and property yield margins.” While, in most other cities, there is talk of increased interest from overseas sources of money, Jim Clarkson of CB Hillier Parker believes Manchester has lost out. “I suspect there would have been considerably more activity from these investors – Irish and Middle Eastern – if there was the quality product,”he says. “Currently, there is not and certainly, as far as the city-centre market is concerned, a lack of development activity means the situation will probably remain unchanged. This lack of product in Manchester has focused foreign investors spending power on other provincial cities – most notably Leeds.” But, once again, there is disagreement among the local agents. Andrew Frazer of Storey Sons & Parker describes the investment market as “red hot” and, while he admits that there is a shortage of product, it is supporting “tight yields”. Michael Jones of Richard Ellis St Quintin is optimistic, pointing to the improvement in city-centre letting activity over the last half of 1999. Investors have been stirred into action, both in forward funding schemes and buying the finished product. He comments: “This occupational and investment demand is likely to continue into 2000 with the previously regarded prime institutional market being joined by both cash-rich property companies and UK and overseas-based private investors, either singly or in syndicate.” Meanwhile, a number of developers are building mixed retail and leisure schemes in Manchester – and this activity has not gone unnoticed by investors. Rawstron points out that Richardson Developments’ Printworks set a new benchmark yield of 6% when it was bought by Hendersons and British Airways. But, like Birmingham and Glasgow, the city’s retail core is going through a period of significant change, and property pundits are waiting to see how the opening of Marks & Spencer’s biggest-ever store will affect rents and pedestrian flows. Top 10 Manchester investors British funds spent the most in 1999 Marks & Spencer £100m MEPC £30m Prudential £28m Henderson c£25m BA Pension Fund c£25m Norwich Union c£23m BP Pension Fund £22m Private Irish investor £22m Abbey Life £20m Morgan Greenfell £20m Source: Dunlop Heywood Top 10 Manchester investment deals in 1999 There are differing views on the state of the market, but it is agreed that foreign investment did not play a large part Property Sector Seller Buyer Price Net initial yield Printworks Leisure Richardson Developments Hendersons/BA Pension Fund c£50m (50%) 7% Stakehill Industrial Estate Industrial Royal & SunAlliance Norwich Union £23m – part of swap n/a Havelock Mills Offices AMEC Development Private Irish investors £22m 6.43% 201 Deansgate Offices British Rail Property Fund BP Pension Fund £22m 6.8% The Circus Leisure AMEC Clients of La Salle Investment Management £18m 7% 41-43 Marker Street Retail Scottish Widows Abbey Life £14.3m 3.3% 81 Fountain Street Offices Standard Life Shell Pension Fund £8.65m 6.73% 61 Stakehill Industrial Estate Industrial Arab Banking Corp Scottish Amicable £7.2m 7.8% Birchwood Point Offices HBG Westmoreland £6.5m 7% Gemini Industrial Taylor Woodrow Liverpool Victoria £7.9m 7% Source: Dunlop Heywood