As Lauren Mills discovers, there are fears that dependency on the airport as the main source of demand leaves this market vulnerable to changing economic forces.
Take-up in the Heathrow areas has plummeted from a peak of 850,000 sq ft in 1989 to about 250,000 sq ft in 1993, and development has ground to a halt. These are the sombre conclusions of a recent survey of the market by Rogers Chapman and Weatherall Green & Smith.
As the report explains, this market took off in the late 1980s, spurred on partly by the introduction of the B1-use classification. But, while local agents like RC’s John Izett would argue that this market has matured from its “boom baby” beginnings, he acknowledges that it lacks the characteristics of an established town-centre market.
As his firm’s report points out, less that 15% of stock was built before 1987. “This means that there is a very limited stock of secondary space,” says Izett.
He also pinpoints this market’s other chief characteristic: “Demand tends to be generated by companies wanting to be near the airport,” he says.
RC/WGS’ research confirms this observation. “There are three types of occupier: those providing direct support services to the airport; public-sector airport-related bodies, such as the immigration services; and head offices of overseas companies.”
The BAA has, for instance, just taken Sun Life’s 51,500-sq ft Mondial office scheme on Bath Road for occupation by its subsidiary Heathrow Airport Ltd.
But, while demand from airport-related businesses provides stability, there are fears that dependency on one sector could leave the area vulnerable to changing economic forces. Not that that airport has proved to be much of a stabilising influence in the past few economically difficult years. During the recession, rents plunged from close of £30 per sq ft at the peak to about £14 per sq ft a year ago.
Nor can RC and WG&S’ research offer much hope for the short-term future: the report warns that incentives remain substantial and that any improvement in rents will probably be short-lived.
However, the outlook for the longer term is more hopeful. The survey predicts that, at current take-up rates of about 278,000 sq ft pa, the supply pipeline (currently about 450,000 sq ft) could dry up by the middle of next year. This could lead to real rental growth, together with only limited incentive, by the end of 1995.
“Supply is tightening and the market s posed for a shift in favour of landlords,” says Izett. This means that deals such as the Immigration Service’s move to 50,000 sq ft at Rheinhold’s Status Park on Bath Road, at a rent of only £12 per sq ft, could soon become a thing of the past.
The latest letting at MEPC and IBM’s Mew Square at Bedfont Lakes indicates that rents are already hardening. Cisco Systems has agreed a 25-year lease on a stepped rent rising from £17.84 per sq ft to £21.35 per sq ft. Incentives include six months rent-free and a tenant’s break after three years. However, a six-month rental penalty is payable if the break is exercised.
MEPC’s Iain Watters is pleased with progress at New Square. “We are seeing tenant demand increase for the best products and, as a result, headline rents are starting to rise and packages are falling.” The remaining 10,290 sq ft is available through joint letting agents WG&S and RC.
Izett is cautiously optimistic that the development cycle could soon get under way again. “Once we can demonstrate that Heathrow is heading towards scarcity, then we will see the funds moving back in. Particularly now that Mondial is let, a shortage is rapidly approaching,” he says.
While several schemes have the green light to go ahead, most developers remain too nervous to commit to a start date. Stanhope has consent for another 570,000 sq ft at Stockley Park, but is unlikely to build speculatively.
This is despite raising millions of pounds by selling off several buildings on the park.
Reebok International’s 37,000 sq ft headquarters was sold for a price believed to be close to £15m, reflecting a yield of about 6.25%, and the 163,000-sq ft EDS Scicon building went for £45m, reflecting a yield of about 7.85%.
Development is also unlikely at Lakeshore, Bedfont Lakes. This follows two blows to the project’s developer, the Rutland Group. First, administrative receivers have been called into subsidiaries Rutland hall and Rutland Holdings which control the Lakeshore scheme; and second, a 190,000-sq ft prelet to US company Computer Associates is believed to have fallen through.
Other proposals, including Meteor Properties’ 30,000-sq ft Concept Heathrow, are also unlikely to proceed until either prelets are agreed, or some of the current supply is taken up.
In the light of the fact that so many schemes remain unlet, this caution is understandable. These buildings are located mainly along Bath Road where rents tend to be lower than at Bedfont Lakes. At Hanson Properties’ Quartet, for instance, 47,000 sq ft remains available at a quoting rent of £21.50 per sq ft. Richard Ellis and Collins Commercial are the joint letting agents.
Another 38,000 sq ft stands empty at Status Park where Richard Ellis, RC and Grant & Partners are quoting £17.50 per sq ft, and at London & Metropolitan’s Dukes Green, 48,000 sq ft is still vacant. Joint agents St Quintin and RC are quoting £19.50 per sq ft.
Savills’ Jeremy Bates attempts to explain this disparity in performance. “Bedfont has attracted tenants partly because of the cachet of the scheme. Also, IBM is there which gives the location a major stamp of approval.” He adds that Bath Road’s linear layout gives the area a feeling of isolation.
And, for as long as new space remains available, the chances of assigning secondhand offices remain bleak. Tandon Computers has agreed a surrender of 15,000 sq ft at Capital & Counties’ Capital Place because assignment was not an option – the passing rent being a historically high £28.50 per sq ft.
Following a refurbishment of the space, CapCo has managed to let 5,000 sq ft to Lawson Software on a short-term lease at a vastly discounted rent.
At Heathrow Boulevard, BBN faces a similar dilemma. It wants to assign or sublet 18,500 sq ft but its lease prohibits doing this at less than the passing rent of £25 per sq ft.
William Susman of Fletcher King, who is advising BBN, believes that the true value is close of £18 per sq ft. “It is top-quality space, but BBN will have a substantial loss because, in order to do a deal at market levels, we will have to give away at least three years rent-free.”
By contrast with the office sector, Heathrow’s industrial base is relatively mature, offering a healthy supply of good quality secondhand space. According to Nelson Bakewells’ Alan Dornford, demand is largely generated by freight-forwarding companies.
He says: “In the late 1980s, demand and competition from freight-forwarding companies forced rents in the Heathrow area to the highest level in the country. At the Trident Industrial Estate in Poyle, for example, rents exceeded £12 per sq ft.” The situation today is very different. While freight-forwarding companies still account for a large proportion of demand, their ability to pay top rents has diminished.
There are a number of reasons for this. Customs clearance requirements have been abolished since the introduction of the single market which has resulted in an estimated £210m loss of business for freight forwarders.
Also, following the Aviation and Maritime Security Act, companies are having to comply with stricter security regulations, which is likely to result in substantial cost implications.
Izett dismisses fears that a weakened freight-forwarding market will have adverse implications for the sector as a whole. He says: “For the first time in three years we have detected signs of a revival of the fortunes of the industrial market. Take-up is up and rents are closer to £7 per sq ft than £5 per sq ft.”
Nevertheless, 90,000 sq ft is still available at CIN’s Radius Park, just south of the airport. RC and H&B are quoting £8.50 per sq ft. Another 50,000 sq ft is vacant at Heathrow Interchange, Hayes, where rents are slightly cheaper – RC is quoting £7.50 per sq ft. And Ashford Developments has recently completed 70,000 sq ft at the Pasadena Distribution Centre, where RC and JLW are quoting £8.50 per sq ft.
Several schemes are planned. Slough Estates hopes to build 40,000 sq ft speculatively at River Gardens on the North Feltham Industrial Estate. De Souza Duncan Cons is the letting agent. And Maclan Developments is building an 80,000 sq ft distribution building close to junction 3 of the M4 at Hayes. Connell Wilson and King Sturge are the joint letting agents.
Overall, the prospect of an emerging speculative-development market is buoying optimism in the area. But Bates is cautious: “Heathrow is still not fully exploited as an office location, possibly because of its poor public-transport infrastructure. This is definitely a weakness and something has to be done.”
|
KEY TRANSACTIONS |
|
