Copyright: David Lawson - Property WeekHome page
The coming 12 months are expected to be even better, according to most observers. The excitement already injected by retail expansion should spread to offices and industry. Rents should at last begin to move as occupiers scramble for a dwindling pool of space. But beyond 1998, the chances of continued success lay in Westminster, Brussels and Seoul. When they sneeze, the rest of the UK should fear pneumonia. The new government has pushed up interest rates with a vigour that could bring the economic recovery to a halt. Overall rental growth will peak next year, according to the latest economic analysis by Grimley. The regions may find the party is over by the time they arrive.
Meanwhile, the Koreans are rethinking some massive inward investment schemes that have boosted regions like Wales, the North-east and Scotland. Brussels is also getting bloody-minded about regional incentives. Former basket cases like Merseyside will keep their Objective 1 aid and Yorkshire will get extra help. Others may yet be culled. For the moment, however, the provinces can look forward to basking in an almost-forgotten buoyancy. 'Just about every regional office centre has bottomed out,' says Chris Hiatt of Jones Lang Wootton. This might be hard to discern, as rents appear static in all but a handful. But that is more a function of lack of product than demand.
There is so little property available that lettings are relatively rare and hard evidence of rent movement is scarce. Headline or 'achievable' rents also hide a picture of declining incentives. Rent-frees are down from two years to 15 months in the last year and may disappear by the end of 1998. Winners over the last year are still clustered in the South-east, however. Towns like Basingstoke, Hounslow and Watford have defrosted in the glow of London's warmth. Edinburgh, Leeds and Cardiff show the proximity rule is not inevitable but each has a special advantage: the Scottish financial boom, regional headquarter demand and input from development agencies are not insignificant.
But there are fears that 'laggers' may miss the revival - particularly if it is short-lived. Substantial cities like Coventry, Leicester and Liverpool may have too few growth firms to climb out of the doldrums. That applies even more strongly to the industrial market. The heat is most intense in the South-east, says Chris Simmonds, divisional director at Richard Ellis, where occupier demand has boosted rents - particularly around the western sector of the M25. Growth is patchy elsewhere, and while it will sweep across other regions fairly quickly, there are some worrying potential laggers.
Poor old Coventry again comes into the picture painted by Rod
Gough, head of industrial at DTZ Debenham Tewson, although he points out that
it dropped less than most other centres during the recession. Towns
like Luton and Watford already sit at the top of the growth league because they
are the first stop for firms squeezed out of an overheating London. These are
the first of a string of centres which will boom in 1998, he says. At the other
extreme, however, more remote centres like Norwich, Plymouth and Carlisle could
take another year to recover. By then, the economy may have topped out.
One bright thread running through all this has been the shopping boom. Windfalls from building societies and reductions in taxes have helped retail warehousing and town centres alike to big profits. Whether this is a stable base for long-term recovery is debateable. Nervous forecasters have little confidence that spending growth can continue to soar as the windfalls run out and a succession of interest rate rises bite. So the overall picture is one of relief that the regions are finally beginning to benefit from economic recovery, but problems may not be completely solved before the roller coaster begins to dip again.
Few eyebrows will be raised by the dominance London continues to hold in the league of UK retail rents, with Knightsbridge, Covent Garden and Oxford Street taking the honours yet again this year. But regional centres have been quietly closing the gap. Meadowhall, near Sheffield, now matches London's Brent Cross with Zone A rents of 300/sq ft, according to latest figures from Colliers Erdman Lewis (CEL). The Metro Centre on Tyneside is not far behind and the Leeds White Rose Centre is only just outside the leaders, jostling with booming south-eastern towns like Kingston and Croydon.
A big gap is opening within the regions, however. 'Super prime' centres are emerging with the catchment areas and quality of space to handle the demands of multiples and department stores. In the 12 months to last May the 19 centres identified by CEL saw rent increases of more than 12% compared with a national average of 8%. This process is accelerating so the traditional distinction between the South-east and other regions is being further eroded and replaced by a separation of super centres and the rest. Towns like Gravesend, Godalming and Walton-on-Thames are therefore left struggling with rent reductions along with Kettering, Worksop and Kilmarnock.
But over the longer term, there are also anomalies which reflect how much retail rents rely on highly local circumstances. The top three losers since over the decade are in London rather than some fading industrial centres. South Moulton Street in the heart of London's West End has the ignominy of dropping 36% in that time from 4th place to bottom of the list. At the other extreme are an unlikely couple of performers, with Sudbury in Suffolk and Hartlepool, Cleveland, showing increases of more than 200%.
The regions can take some satisfaction in their constant rivalry with London that so much of the performance seems to have been concentrated away from the South-east. But as in some other sectors, the figures hide as much as they reveal. 'London appears nowhere because it has gone down and come back up between 1992 and 1997,' says Rod Gough, head of industrial property at DTZ Debenham Thorpe.
This hidden factor explains Luton and Watford's supremacy over the 12 months to last summer, as businesses are squeezed out of the capital to settle just outside the M25. Doncaster, Sheffield and Nottingham keep the regional flag flying because of the development efforts being made to counter mining closures. Over the longer period there are also special reasons why northern centres top the list. Sunderland has seen a renaissance via inward investors like Nissan bringing the area up from depths plumbed as shipbuilding and oil declined. Chester is like Luton - well positioned for overspill from a neighbouring conurbation.
All the figures have to be kept in proportion, however, as most regional rents are coming up from a very low base. Many qualify fro the top ten by the addition of a mere 50p to rents. Some have also stuck on the levels achieved last winter while others continue to creep up. Gough sees the p ulum continuing to swing back to the M25 fringe as south-eastern centres pick up the expansion from London. Laggers will be centres like Norwich, Plymouth, Carlisle and Swansea, which all have to overcome remoteness. But even these could begin to move in a year or two as the economy grows.
An eerie sense of flat, unrelenting calm appears to lie across the main UK business centres. A handful stand above the horizon with double-digit rental growth but most still appear becalmed. But it is worth keeping in mind the old adage of lies and statistics. 'Percentages can be a dangerous measure of success and failure,' says Chris Hiatt of Jones Lang Wootton.
Centres like Peterborough, Bournemouth and St Albans which appear to be racing away from the field have jumped from an unrealistically low base values. Poor old Ipswich suffers a double-digit negative because it traditionally offers basement rents which can easily slip below ground level. The key players are hidden within these extremes. Bracknell, Guildford and Maidenhead are racing away off already-high levels. This shows how growth has spurted in the prime areas west of London, says Hiatt - a tr expected to continue over the next year.
Much is also happening below the surface in the mass of nil-growth centres. Headline rents hide a gradual attrition of incentives. 'In many cases effective rents are rising as rent-free periods shrink,' says Hiatt. He points out that main centres like Bristol, Leeds, Manchester and Birmingham have all bottomed. Final-quarter figures for 1997 are expected to reflect that deals are being done in centres west of London with no incentives, so these will show even bigger growth in achievable rents. Zeros should begin to disappear from the rest by the of next year, but some will still struggle to keep up. Brighton, for instance is an ' of the line' centre, which restricts demand. Coventry has a narrow business base while Leicester and Liverpool do not have the economic strength to keep up with the leaders.
Investment has tended to move in line with the broad property sectors over the last year rather than showing much variation on a regional basis. Retail warehousing, for instance, is flavour of the month wherever these glossy sheds are based and prices reflect the 22% annual return shown by the Richard Ellis Monthly Index (REMI). Offices have been pushed to second place in the index, with capital growth of only 5.5% but pressure must be building as rents grow at an annualised 13%.
Little impact has been seen in average prime office yields so far. In fact, Bristol is the only centre picked out by Richard Ellis as showing a different yield to a year ago - and that was a softening to 6.75%. Growth has been concentrated on high-demand areas like the Thames Valley while the regions have had little to offer investors as rents remain stagnant. But RE expects growth to ripple out over the next two years.
Industrial property, currently showing a miserly 3.1% annual capital growth, should benefit even faster, with rental growth in most regions by the end of this year, says RE. Retail remains the star, however. While London retains the lead as best performer the regions have seen the benefit of windfalls and tax cuts flowing into spending. This has flowed heavily into areas like household goods like carpets and furniture, which is one reason why retail warehousing has done so well. Regional centre rent rises are also kicking in with Liverpool and Leeds now matching buoyant centres like Manchester and Birmingham.
The difference in scale between London and other UK centres jumps out of any planning statistics. According to latest government figures, Westminster passed almost as many applications in 1995/96 as Leeds and Birmingham combined.
Time rather than volume is a more interesting measure for impatient developers, however, and these also show wide variations across the UK. Worthing cleared almost all its decisions within the statutory eight-week period while similar local authorities struggled to less than half.
Deeper investigation reveals this is due to differences in procedures rather than efficiency, says Jeremy Hinds of Grimley's Manchester-based planning consultancy. Hart, for instance, prefers to discuss applications rather than refuse them. Worthing does the opposite.
But this small Surrey town sets a lead in different ways. Planners take videos rather than wait for councillors to fit in site visits, says Hinds. Committees also meet more regularly than elsewhere, and members are given training courses rather than having to learn on the job.
National totals show speculative activity slowing, with applications down to 455,000 in 1996 compared with 681,000 at the 1989 peak. London went against this tr with a 4% rise but even a depressed region like Merseyside showed chinks of light. Hinds says 93% of applications were approved compared with the 84% national average, indicating a pick-up in commercial activity.
Complaints by environmentalists and Conservative politicians that the new government has softened its stance on out-of-town development do not stand up, according to an analysis of schemes across the regions by Healey & Baker.
Only two out of seven food store appeal inquiry decisions since the election have been allowed, says the property consultant. Two large inquiries at Peterborough and Mansfield covered 16 competing retail warehousing schemes were directly determined by the government. Only two were allowed - both in Mansfield.
The regions are a natural target for developers pushed out of the crowded South-east. But they are not getting an easy ride from either local planners or the government. Adam Pyrke of H&B points out that the government has allowed only three proposals - 12.5% of the total - while inspectors have allowed five out of nine schemes.
Even then, there were special circumstances. One permission at Birstall was next to an existing retail park while another was allowed outside Canterbury to protect the historic town centre.
'It is clear there has been no relaxation,' says Pyrke. Retail warehouse consents may be slightly easier - although many are limited to bulky goods. Foodstores remain 'very difficult' to get past planners and the government.
That means developers looking to the regions for future expansion will have to build a strong case on the 'sequential test' drawn up by the Tories who are currently claiming this rule has been waived.
Construction is the unfashionable coalface of the property industry overlooked in the obsession with rents and returns. And it is a surprisingly busy even in regions often dismissed as 'depressed'.
Tender prices are a good indicator of the bargaining strength of builders and these are rising right across the country, according to cost consultants Gardiner & Theobald. London is drawing ahead, with increases of 5.5% in prices over the third quarter of 1997, and projected annual rises of 6.5% up to the end of the decade. But the regions remain in touch as part of a national 5% average rise.
Some growth is admittedly coming from artificial sources. In Tyne & Weir, for instance, G&T suggests some fears whether the current flurry of building can be sustained after when much is coming from one-off projects by the Development Corporation and Millenium Commission.
Northern Ireland is also among Millenium beneficiaries but it also has a surge of investment following the peace talks initiative and skill shortages are already beginning to appear.
Regional centres are also busy beneath a surface. Office building has finally taken off in response to diminishing supplies and growing local economies in cities like Leeds. Bristol and Manchester were inside the gate which recently closed on regional shopping malls, so they have Cribbs Causeway and Dumplington to keep the diggers working.
Cardiff has its Bay developments and new stadium and Newport the LG factory - all giant scale projects. But the rest of the region is looking sparse. So are large parts of Scotland outside the hot spots of Glasgow and Edinburgh and the South-west outside Bristol. That can be seen in the lower tender price increases forecast for these regions by G&T.