Copyright: David Lawson - appeared Property Week June 1999Home page
Pity the poor property investor. For decades the industry trundled along rigid lines, producing simple, understandable buildings like offices, warehouses and shops. Not any more.Call centres are the latest in a series of hybrids ranging from B1 business space through retail warehousing and leisure/retail. And just like those earlier breakouts, they have left investors bewildered, nervous and cautious.
Is there an emerging market? St Modwen's sale of the Egg building in Derby for more than 14m pounds, plus a clutch of other gestating sales suggest there is. But they are still tiny sparks in swirling grey clouds. It took ten years for retail warehousing to mature as a strong investment sector; leisure reached puberty in around three years; call centres could be considered still in the conception stage. Whether they will mature remains a matter of hot debate.
'A large number of operators have rushed in to set up call centres, so they have been forced to buy,' says Jeremy Brookes of GVA Grimley. 'But these are seen as cost-saving operations so they will be looking for sale and leasebacks.'That may not be easy. Firstly, there is no such thing as a standard call centre. They vary from office blocks through converted sheds to purpose-built, high-tech giants. Investors struggle to set values by forcing each type into a category they understand.
Why bother when they can get the real thing? Because demand is so intense that growth seems assured at a time when conventional property is under pressure. Figures are hazy but one survey has estimated there are more than 2,000 call centres in the UK and another 1,700 planned by the end of the year. Businesses will continue to spin off customer services and telephone operators take advantage of selling cheap services, according to a Henley Centre study for the Merseyside Development Partnership. European banks alone are spending almost 550m pounds on call centres this year, says Datamonitor.
Tapping into this growth is producing a series of fudges similar to those invented to handle retail warehousing. The Egg deal is understood to have involved fixed annual uplifts of between 2.5% and 3% a year on a rent of 8 pounds a sq ft - a level set between offices and sheds for the area. But this cannot be taken as a sector benchmark. It represents only the level for a large shed. Simple logic shows that most call centres are hidden away in conventional office buildings. If little has been done to change the fabric or there is a strong covenant, they will be classed with local office rents, says Andrew Bull of Jones Lang LaSalle.
The problems arise with property that does not fit so neatly into conventional categories. A 100,000 sq ft, single-storey building may appear an iron-clad investment because of a strong covenant such as BT. 'But what else could it be used for?' asks Stephen Bantoft of Cannock Group. 'A lot of occupiers are beginning to realise they could be left with a white elephant if technology changes and they have to shrink or withdraw.'
If occupiers think that, no wonder fund managers are nervous about getting involved, particularly where covenants are weaker or the buildings are in poor locations. Many industrial conversions will lose credibility if their high-tech tenants disappear, or the grants that drew them begin to fade. There is also a trend away from giant centres as technology improves. Other threads in this tangled weave only add to the confusion. A new breed of call centre is emerging where operators contract out the interior fit. 'It is uncertain how the market will structure rent reviews on such properties,' says Bill Lynn of Storey Sons & partner. 'We can only make guesstimates.'
In this fluid and uncertain climate, a mixture of development bodies, overseas and private investors are making the running. Merseyside has attracted 65m pounds of call centre investment including big names like QVC and Abbey National despite the prevarication of institutional investors. A developer such as Neptune can rely on European grants to plan conversion of redundant hangars around the old Speke airport.
A Swiss group, Immobilie, bought the Egg centre. 'Foreigners consider property as mathematical exercise and look to balance sheets rather than long-term future,' says Lynn.
Private UK money is leading the charge for Highbridge Properties, which has built more than 925,000 sq ft in areas such as Tyneside, South Yorkshire and Swindon. 'The funds don't yet understand call centres,' says managing director Guy Marsden. He is seeing some institutional interest in current schemes, however, and tries to provide a few simple guidelines through the fog. Areas of concentrated activity like Glasgow and Leeds will have enough comparable evidence to estimate rental growth - even if underpinned by geared or fixed-uplift reviews, he says. Purpose-built centres should rely on residual B1 use. Conversions in poor locations will not command such high values
But if funds need to go through a learning process, so do developers. 'Call centres are a challenge to the property industry,' says Paul Spencer of Jones Lang LaSalle. More information is needed to produce what tenants need rather than a fudge of existing ideas. Then a defined investment product may emerge. In fact, a lack of product rather than perception may be the heaviest drag on development of a significant investment market. 'If the industry built the right space, it would be taken up,' says Brookes.
But how do you serve such a wide variety of needs? You don't. 'It would cripple any future market if they were given everything they asked for,' says Bantoft. Big, open-plan barns are out of the question. Demands for hefty parking to cover overlapping shifts are also unreal in the current planning regime, adds Marsden. He spends as much time educating occupiers as investors.
One solution to the confusion on both sides is to by-pass all the formats. Cannock is developing serviced call centres, which could give occupiers an alternative to rushed purchases and hefty fit-out costs. They also insulate investors from short leases, esoteric rent formulae and potential white elephant buildings. The Merseyside Partnership report showed demand will be greatest in future for smaller centres. But there is a huge burden where fitting out can make up 70% of the cost of a building, says Bantoft. Below 50 or 60 desks, it is more economical to take serviced space.
Another role is to give occupiers breathing space to decide what they want. Spencer points out that companies work on a ludicrously short six-month timescale for setting up call centres - one reason why they may rush into buying something unsuitable. Sharing could also offer an eventual solution to the 100,000 sq ft barns that formed the first generation of call centres. In the meantime, Callflex is rolling out its own product in Glasgow and South Yorkshire and has plans for London and Manchester with another half dozen possibles pencilled in for the rest of the country. Morgan Stanley has just taken the first centre, in Glasgow and 15m pounds has been lined up to fund 60,000 sq ft in two buildings in South Yorkshire.
Private money, of course, is funding this revolution, but there is hope for a move into the deeper pool of institutional investment. Bantoft says there have been talks with a few fund managers. It seems a promising lead, as funds will be able to take comfort from a long lease with conventional uplifts from Cannock rather than fiddle with a plethora of short-term tenants. Regus has ploughed this furrow with offices, so it will be a familiar message. And if there is one thing fund managers like, it is familiarity.