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From left to right: Paul Firth, office managing partner, DLA Piper Rudnick Gray Cary Steve Faber, fund manager, RREEF UK John Watkins, portfolio manager, Unit Linked Fund, Standard Life Investments Robert Grafton, development director, Wilson Bowden Properties David Topham, director, CTP Development Stephen Hodgson, partner and regional office head, Knight Frank |
The speculative development market across the regions has had its fair share of bad press in recent years. Much was made of buildings such as Hemel Hempstead’s Peoplebuilding, a cutting-edge design which had to wait three years after completion to find a tenant.
Added to that are the varying vacancy and take-up rates. The 2005 vacancy rate statistics produced by Knight Frank show little change from those of 2004, while last year, take-up in some regional centres, such as Cardiff and Liverpoolwas at its lowest since 2002.
It is understandable that developers and lenders should be cautious about the regions. But despite this, there are those who believe there is a lot of life in the regional speculative market — especially in centres such as Manchester, which had faced a chronic shortage of space before banks and funds stepped into push development.
According to predictive 2006 year-end figures from Knight Frank, rents are set to increase in all the major regional centres (see market roundup, p100). So the demand clearly exists.
But what is the real picture of regional speculative development? Who is pushing it forward, and how is the ever-growing green agenda going to affect development?
These were some of the questions put to a panel of fund managers, developers, fund managers and agents last month. The group met at 1 St Paul’s Place — a 72,000 sq ft speculative scheme built by CPT/St James Securities — in the heart of Sheffield’s city centre. Phase one of the project is already complete, and there is permission for phase two, a 66,000 sq ft office scheme next door, to be called 2 St Paul’s Place.
The session was hosted by Stephen Hodgson, partner and regional offices head of Knight Frank in Sheffield.
Property companies have been the most active speculative developers in the regions. Is this likely to continue, and what is the funds’ perspective on undertaking direct speculative development?
Watkins: Out of London, it is bound to be property companies, as not many funds have branch offices in the regions. This means property companies are more likely to identify opportunities because they are on the ground.
Topham: In terms of speculative and new development, property companies are the ones at the forefront of locating new sites and of obtaining planning consent, and we are instigators in many cases.
Faber: We are trying to get more exposure to prime property — we have done it, but speculative development can only account for 15% of our fund and we often need to rely on jv partners or development partners.
Where do we see speculative development more likely to be undertaken? In the city centre, edge of town, or the business parks?
Hodgson: Building speculatively in city centres is always difficult because it takes a long time for site assembly, and planning permission is harder to get.
Topham: But that is one of the protections of the market, because people just can’t go in and build a building anywhere they like in the city.
Firth: As a company, we specifically invested in this building [1 St Paul’s Place] because of where it was, being in the heart of the city centre, and because of the environment around it, with the Winter Gardens and Millennium Galleries.
Grafton: Traditionally, we have built small, out-of-town office buildings, because in town has more constraints. Also, there’s more flexibility in getting planning permission out of town compared with in town.
Faber: Out-of-town development means it can be phased easier, but the city centre is the place to be doing spec build now.
Where are the hot spots for speculative development in the regions?
Firth: Sheffield is one that is very much under development.
Faber: Birmingham; it’s got a massive development pipeline. But much is tied up in larger schemes which may struggle to start, offering good opportunity.
Grafton: We have to look at the secondary towns and cities such as Bradford, because that is where they have the potential to build.
What is the position of mixed use in speculative development — is the whole mixed-use issue making speculative development easier or more difficult?
Grafton: Mixed use is making speculative development easier in many respects because risks are reduced as the overall picture is bigger.
Hodgson: Yes, it enables you to spread the risk.
Watkins: One thing about mixed use is that it has to be sustainable — but you see councils trying to force mixed use into areas where operators are not suited. You have to be in a strong location and not just in a residential scheme with retail tacked on.
Topham: It is simply naive to say that mixed use should be applied to everything. Mixed use has a larger role in regeneration over many years, and you need that balance of risk.
Faber: You need to be pretty certain you will let your retail and that you will sell your flats, before you can undertake speculative office development which, depending on the location, could hamper starts.
Watkins: The question should also be asked about the future use of the mixed-use schemes. How will it be used in 25 years’ time? Especially as you get occupiers working on different lines — this makes it difficult to structure the building. At some point, occupiers will end up on a commercial lease.
Firth: Being honest, we wouldn’t have taken this building if there had been residential above. It’s all about image and how it works with the rest of the building.
Hodgson: From the occupier point of view, there is not enough quirky design.
Topham: But, from the point of view of the investor, once the client who wanted a quirky design has jettisoned, the investor is left with the building that will be difficult to let to someone else.
Does it make sense to build environmentally-friendly buildings now, given the extra costs? Is it a selling point to potential occupiers? Bearing in mind the changes in legislation, could there be a risk of buildings falling outside new legislation if they remain empty too long?
Faber: In short, it makes sense to consider green issues. It is a selling point to occupiers. But the perceived issues may overstate the real issues. If you have a normal office in a good location or a green office in a bad location, which will be leased?
Hodgson: Well, the demand from occupiers for green buildings is definitely out there. We are getting more enquiries from the private sector, which is concerned about green issues.
Topham: We are spec-building a BREEAM building in Leeds called the Round Foundry. We are spending a lot of money on it and we are not getting any more rent for it, but we wanted to experiment on it because everyone is interested in green issues.
Firth: Developers think the funds are really reticent about the new BREEAM regulations, but that is wrong.
What does the future hold for speculative development? Will the attitude of the lenders change?
Topham: Banks are really cautious at the moment.
Firth: Yes, the Bank of England is definitely getting more cautious.
Faber: Being an investor-led bubble at the moment, and with the banks having been burnt before, they will definitely not want to get burnt again.
Watkins: It’s very much based on market fundamentals. There are a number of elements, such as the increasing sophistication of investors, the need to offer varied product and the need to get a return. There are also going to be more funds coming into the market.
