Growth areas: Agents are hoping that huge infrastructure projects will help to strengthen the county’s property markets. By Adrian Morrison
More than £16bn of infrastructure investment is being targeted at Essex and east London – a region that is earmarked for major growth. A vast area stretching from Romford to Colchester is set to benefit.
However, with the exception of the Thames Gateway, the recession has seen property activity in the county almost grind to a halt. In the short term, no one is dreaming of a bright future instead, they are battening down the hatches for a stormy present.
“Each town in Essex has its own problems,” says Savills’ head of agency for Essex, Hugh Cranston. “There is a lack of confidence and people are being cautious.”
Enquiries for offices and industrial properties are significantly down from a year ago, with rents – especially at the top end – coming under increasing pressure. Take-up across the board is also considerably down. The one-time resilient market for small industrial freeholds is equally sluggish, particularly compared with one year ago, when take-up was high. Since then, availability has rocketed in all areas except Romford.
Letting schemes
Standard Life, for example, has 70,000 sq ft remaining at The Hub at Skyline in Braintree, which was completed in 2007. “New-build industrial schemes are perhaps a little difficult to get rid of,” says Cranston.
This is something of which developers are only too aware. Andrew White, chief executive of Rugby Estates, manages the listed fund O Twelve, which was created to reap the benefits that the 2012 Olympics will bring, not just to east London, but also to Essex, the Thames Gateway and Kent.
“We are not developing, nor are we looking to add to our portfolio,” he says. “We are entering a period where tenant demand is weakening. Rents and demand follow GDP.”
It is unlikely that any significant speculative schemes – office, industrial or retail – will get off the ground this year. It is possible that prelet schemes could move forward but, given the harsh terms being imposed by lenders, coupled with a reduction in demand, numbers will be small.
In addition, few in the market believe that lending, when it does finally return, will be as accessible as it was compared with recent years.
Tenant defaults are likely to become a major concern. Jim O’Connell, divisional member in Glenny’s Basildon office, says: “We have not yet seen an increase in distressed sales. It seems to be focused on the retail sector, but there is certainly concern for office and industrial tenants.”
Although retail has experienced the most obvious business failures, it is widely accepted that the repercussions of a deepening recession will affect all aspects of commercial property.
But is the gloom as dense as it appears, and does a low-volatility market such as that in Essex have advantages over London’s?
Some landlords have decided they do not have to be passive victims of macro-economic factors, and are adjusting quickly to the downturn. Chris White, head of investment and asset management at developer/investor Wrenbridge, says: “There are still tenants out there, but landlords have to realign their rent expectations. The biggest thing is flexibility. Every property is driven by a different investment strategy. You can go for 10-year leases but also be flexible.”
Making concessions
White cites Wrenbridge’s Colchester scheme, The Square, as an example. The 28,300 sq ft office on the River Colne near the A12 has been ready to occupy since February 2008, but has not secured a tenant. In response, the developer is now considering breaks at year three. “We will talk about rent-free periods and fit-outs, but the biggest concession you can make is on the lease length,” says White.
Flexibility applies to covenants as well. O’Connell believes landlords will have to be “a bit more relaxed” about the surety for covenants.
Other landlords in the county are being more open about incentives, perhaps in the realisation that prospective tenants are already aware of the leverage they have.
“A lot of people are remarketing with quite visible incentives,” says Savills’ Cranston. “At Braintree Business Park we have eight industrial units still to go, and we are sending out material saying there are opportunities to buy stock worth more than £110 per sq ft for £95 per sq ft, provided clients complete before the end of March.”
He is also telling leasehold tenants at the park that their first year’s rent will be halved – the type of incentive normally arrived at through a volley of negotiations behind closed doors. Interestingly, the business park is not offering shorter breaks.
These strategies should aid the county more than they would in other parts of the UK. Some commentators claim that Essex will recover quicker from the recession than the rest of the country, and point to the Thames Gateway, which is experiencing unusually high levels of activity in infrastructure and regeneration projects.
White says: “East London has a £16bn commitment to improve accessibility. It will soften the impact of the economic decline, possibly more than any other part of the country. It is like throwing a stone into a lake. Essex will benefit from the ripples of regeneration, but obviously not to the same degree as Stratford.”
There have been enquiries for disaster recovery space and facilities for back office functions in the county, which is viewed favourably by companies that had previously considered London but which are now cutting costs.
Chris Goldsmith, director of Chelmsford-based Turnstone Estates, which has office, retail and leisure developments in Chelmsford, agrees that lower costs are attracting occupiers, but thinks the county is higher up the pecking order. “My experience of real, hardcore relocations of back office operations is that those firms want to go to much cheaper places, such as Cheshire or Mumbai. It is more likely that Essex will see mid- or even front-office relocations.”
Equally, the county could benefit from softening yields as values start to stabilise. Cranston says that, overall, the markets may have come down by 20%, “but into 2010, things will level off and will start to pick up,” adding the caveat that markets do not rise as quickly as they fall, so it could yet be a long haul to recovery.
