Copyright: David Lawson/Financial Times April 1997Home page
Friday will be the day when computers are spitting out the inevitable glitches of the first month into a tax year. Desks will also lie thick with bills - gas, electricity, telephones, cleaning, security and, of course, the dreaded quarterly rent demand. All will need processing before the looming weekend and bank holiday.
Not a problem to bother the property industry, you might think. Political trends should be far more significant to a sector buffeted by planning controls and watchful for further restrictions on greenfield development and traffic generation. Wrong.
Firstly, the industry sees so little difference between the two main parties over these issues that it is almost indifferent to who wins power. 'The only clear blue water you see in this sector is part of the landscaping on our parks,' says one leading agent.
Any further restrictions by either shade of government hold little fear for Patrick Deigman, chief executive of Arlington, Britain's dominant business park developer. That could be put down to the 12m sq ft of unused planning permissions his firm has still to exploit. But he prefers to stress that successful developments have already been doing what the politicians want.
'We anticipated these demands long ago by providing facilities such as public transport,' he says. 'That is what tenants want.' This flexing of occupier muscle is the key to the future of the sector - which takes us back to the importance of harassed finance directors. It is the key to changes which could revolutionise business parks over the next decade.
Deigman points out the 'mistaken belief that business parks sprang up only because firms wanted to move out of town to pleasant countryside locations.' That factor was important, but the real influence was to increase efficiency, he says.
A study by Price Waterhouse showed how productivity has increased after among occupiers after moves onto parks. . This is being picked up by a wider band of occupiers, broadening the tenant mix on parks from the original high-tech pioneers. KPMG, for instance, has pulled out of local town centres to centralise audit operations at Arlington's Reading park. Barclaycard moved out of Northampton to a business park.
Drastic cost-cutting has outlived the recession, however. In a low-inflation, high-competition economy, occupation costs will continue to come under pressure, says Tim Heatley, head of business parks at property adviser Grimley. How the property industry responds will be crucial to survival.
That means working with occupiers to further increase efficiency. Those service bills, for instance, take up not just vital cashflow but an enormous amount of staff time. Business park landlords could take over the responsibility. Bulk-buying alone can save as much as 30 per cent on bills like power, phones and administrative services, says Deigman, who is already testing this kind of service on a couple of his parks.
But he sees even bigger changes before the end of the decade. Moves being pioneered by the government private finance initiative (PFI) could see finance directors facing a single bill each month for all occupancy costs - including rent. Occupiers want to concentrate on their core business rather than fiddle around with property matters, says Deigman.
Business parks could spark this revolution. They are usually controlled - if not owned - by a single decision-maker. That makes it easier to plan and manage communal services such as landscaping, utilities and phones. Economies of scale also kick in when security, cleaning and catering can be supplied for groups of occupiers.
There are big hurdles to leap, not least the attitude of investors who will bridle at the loss of long-leases, regular rent reviews and rising asset values. But another revolution is under way which could help leap those barriers. The industry is trying desperately to improve liquidity by securitising property - in effect, splitting investments into more manageable chunks. This would suite business parks, which offer a range of occupiers to spread risks and returns.
'Institutions basically want cashflow, and new kinds of management applied to business parks seem an ideal solution,' says Andrew Martin, investment partner at Strutt & Parker.
Ironically, while politicians foment about restricting greenfield development, there may not be enough parks to satisfy either investors or occupiers by the next decade. Tony Fisher, head of regional offices at Chesterton, says that apart from a couple of major schemes like the Prudential's 2.5m sq ft Reading park, no land has been earmarked in the south-east for eight years. Central and local government have to accept that occupiers will not move to poor locations, and get on with planning infrastructure for more parks, he says
And it had better happen fast. James Kennedy Cooke of DTZ Debenham Thorpe points out that the 13m sq ft of existing planning permissions across the country appears to offer eight years' supply but may never be built. A study of tenants shows they demand a high level of amenities like public transport and local shopping, and many sites could not meet these requirements.
'The days of buying a field and chucking up buildings are gone,' he says.
Eyebrows jumped when Computer Associates slapped 10m on the table for a 200 acre site on junction 5 of the M4 west of London last January. They rose even higher this month when the software giant applied for permission to build a 250,000 sq ft headquarters.
The move follows big commitments to new space over the last year by other big names like Cisco Systems, Microsoft, Zurich Assurance and ICL. Most have found it on business parks but CA showed that it was happy to plough its own furrow to get the right location and premises.
Insiders put these moves down to a combination of hope and fear. The former is spurred by steady economic growth, which means many firms are bursting out of existing space. CA will move more than 500 staff from Slough to extra elbow room in the new HQ. The fear is that planning controls will restrict future expansion. Companies are, therefore, landbanking - taking extra space for future needs and grabbing individual sites where they cannot find business park space.
This is already raising the spectre of shortages, particularly in the south-east, home to two-thirds of the country's parks. But buoyancy is also emerging elsewhere, with big lettings to BT in Edinburgh and FTP software in Birmingham.
All good news for the industry, particularly as the surge in demand is reflected in smaller lettings which make up the bulk of the market. At the 850,000 sq ft Birmingham Business Park, for instance, 20 deals including sub-lets have absorbed 93 per cent of available space, says Andrew Martin of agents Strutt & Parker.
'This has laid the bogey that second-hand buildings could be a problem,' adds Tim Heatley, head of business parks at Grimley. It is also encouraging for developer Arlington, which has sold more than 2m sq ft of space across the country in the last 12 months and just put in plans for a new park in Manchester.
The revival has yet to stimulate a surge of speculative development, however. UK park construction rose just 6 per cent in the second half of last year, according to Grimley. This kept availability down to a little over 2.6m sq ft and shortage of space is blamed for cutting lettings by 35 per cent.
Headline rents are also taking time to respond, although Strutt & Parker/Barber White research estimate 6 per cent growth in 1996 and capital uplift of 4 per cent. This compares with a total return of 3.9 per cent in the Strutts/IPD Index for the previous year.
Yields have hardened to 6.5 per cent as funds move back into the market. Notable deals include more than 30m paid by Friends Provident for the 97,000 sq ft Cisco took at Stockley Park at rents up to 26.80, and the 6.65 per cent yield on a 10m Stargas purchase of the 40,000 sq ft let to a Kingston Telecoms subsidiary on Edinburgh Business Park.
Off-centre retailing has taken the market by storm over the last few years. Behind an ugly duckling image of big sheds, paint pots and flashy furnishings is a sector that has easily outperformed every other kind of property.
Returns held up even in the recession to average 9.3 per cent in the 15 years to 1995, according to the Investment Property Databank. But there is even better to come. Tough planning restrictions on new development, growing spending levels and fierce competition for space could see top rents hitting 70 a sq ft next year and 85 by the end of the decade, says Edward Farrar of Colliers Erdman Lewis (CEL). 'There are already examples of as much as 50 offered and 38 achieved.'
This is all the more impressive when rents of more than 12 were rare five years ago. These levels have to be put in perspective, however. Retail warehousing has been around since the early Eighties and most is still based on the original food, DIY and furnishings trade. Farrar points out that most are paying around 10 a sq ft. But high rollers like Next, River Island and Burton are moving in, paying big rents and helping change the duckling image into a more elegant swan.
In fact, the whole approach is moving closer to the gloss of business parks. They are much smaller - typically 120,000 sq ft on eight acres. The buildings are also more basic - essentially just a big tin box retailers individualise with their logos. But values are soaring. While still the baby of the industry, these parks already worth more than 5bn - about a quarter of the IPD retail portfolio, says CEL.
The drive is coming from increasing competition and shortage of space, which has driven high street names to find new outlets, says Gerard Gillingham of Knight Frank. These fight tooth and nail for sites with 'open A1' planning consents, which allow almost a free choice of what to sell.
'Institutions have realised that the scope for rent growth is considerable,' he says. Even at projected levels, unit costs are lower than high streets. But Farrar insists that they are not the threat to town centres many claim. And he dismisses suggestions that a Labour government would charge for parking as 'absurd'.
Planning controls will not go away, however, which virtually assures growth. Whether it can continue at projected rates is more debateable. Tenants like DIY stores are already finding rents a strain and early investors have already stopped buying, citing high prices. But those still looking for a foothold will continue to force the pace, says Farrar.