Copyright: David Lawson/Financial Times 1996
There are signs that this is beginning to change. Net investment reached 33 million pounds last year after an 18 million pound boost in development spending, according to the annual index published this week by Strutt & Parker and the Investment Property Databank. Total investment by leading institutions was 773 million pounds by the end of 1995 - five times the level in 1986. That is still only 1.6 per cent of total property holdings: 'But it shows growth is continuing,' says Andy Martin, a Strutts partner.
The picture is likely to look even better by the end of this year, following a surge in lettings and purchases. Investors have shifted from development to purchases of standing investments as their main route to increased business park weightings, says the Strutts/IPD Index. Legal & General, for instance, has just announced a clutch of deals worth 90 million pounds, including the 112,000 sq ft Mercury Communications headquarters on Concord Business park, near Manchester Airport, Heathrow West business Park, near Langley, and five buildings on Birmingham business Park. More purchases are understood to be in the pipeline as the fund rebalances its asset mix more towards out-of-town property.
This is understandable, because city centres are falling out of favour, says Angus McIntosh, research director at property consultant Richard Ellis. 'Investors don't know what is going to happen as tenants reduce space demands and both shopping and people move out. They don't know what is going to happen over changing work practices. In general, they are nervous about offices. If they are going to buy anything in this sector, they will choose to look out of town.'
The message is picked up by the Strutts/IPD Index, which says: 'Even those in the forefront of hot desking, hotelling and homeworking recognize the need for a central focal point of the quality that business parks offer.' The precise impact on business parks often the subject of hot debate, however. There is little argument that occupiers and investors are looking out of town; the problem lies in defining which developments are most successful. Strutts insists on measuring only those which match criteria such as size (minimum 50 acres), low density development, generous parking and a single master plan. The aim is to filter out a mass of poorer quality sites which can blur the investment picture. That means performance figures can be less comprehensive than some investors prefer.
Some look instead to to IPD's benchmark index for the industry which recently created a special section for office parks, chosen on a much wider basis. This shows net investment fell from 137 million pounds to a mere 23 million pounds last year as part of the general shift away from the sector. But at least the figure remained positive. Investment in towns reversed from more than 425 million pounds to minus 390 million pounds - mainly because of disenchantment with London offices.
Total returns on parks were 3.7 per cent and yields 8 per cent compared with urban office figures of 2.8 per cent and 8 per cent respectively. Capital values fell right across the market but office parks saw a 4 per cent decline compared with 5 per cent in towns. But Strutts, which has been closely involved in developing some of the country's elite schemes as advisor to business park specialist Arlington, felt there was an even better story behind these figures. And rather than create an opposing index, it linked up with IPD to give a more comprehensive picture.
This shows that parks meeting the tighter criteria outperformed not only towns but also office parks - and have done throughout the ups and downs of the last decade. 'Business parks have registered average returns three points a year better than office parks, almost four points a year better than standard offices and more than two points a year better even than the IPD all-property average,' it says.
Annualised total returns from 1986-95 average 11.6 per cent compared with 8.6 per cent for office parks and 7.8 per cent in towns. This is all the more impressive because it includes a 28 per cent drop in the three years to 1994. A collapse in occupier demand took a heavy toll on rents which had been soaring after town centres peaked and business parks established themselves. Even then, headline rents were more robust than city centres, it says, and by last year parks appeared to benefit more from revived demand by rising 1.2 per cent compared with a 1.3 per cent fall in towns.
Yields have not done as well as office parks but have risen at about half the rate of standard offices since 1986. This, more than rents, is the chief reason for outperforming central London. By the end of last year average equivalent yields stood at 7.7 per cent, although individual deals have been done at 7 per cent or less
This emerging track record is enough to attract more fund managers, although development finance is still elusive. Prices are even beginning to worry some. 'Business parks look a bit expensive nowadays,' says Nick Thompson of Prudential Portfolio Managers. He is not too unhappy, however. The Pru is also a developer, with big plans to launch the long-awaited Reading business park. Rising values have already attracted potential partners, who should be announced soon.