UK Regional Office Development MarketView CBRE Global Research and Consulting

Q4 2012

OFFICE SPACE UNDER CONSTRUCTION

OFFICE SCHEMES WITH PLANNING

OFFICE BUILD COSTS

REGIONAL OFFICE DEVELOPMENT ACTIVITY 2012 Introduction

Grade A supply becoming scarce

One of the marked impacts on the office market since the start of the downturn in 2008 has been the major reduction in the volume of office space being developed. Building starts plunged to zero in many cities, and the full impact is now being seen with very low levels of completions expected over the next 2-3 years. There is now 1.75 million sq ft of office space under construction in the UK’s major regional office markets, of which almost 1m sq ft is already pre-let.

In many of the UK’s largest city office markets the availability of good quality, Grade A space is in increasingly short supply. Steady levels of take-up over recent years, combined with a lack of significant development activity has led to this gradual erosion. As the chart below demonstrates, the choice of building is limited for occupiers with very large requirements. There are two or fewer Grade A properties offering more than 75,000 sq ft in all cities except for Birmingham.

Nevertheless, during the last 12 months, there has been a renewal of development activity at all stages of the process. We have seen new schemes break ground thanks to a handful of pre-lets. In addition there has been a number of new planning applications approved. Meanwhile in the South East, a number of projects have begun on a speculative basis. This report provides a snapshot of office development activity in the UK’s major regional cities and identifies the key schemes that could shape regional markets over the next two to three years and beyond. In the first section of the report we provide an overview of the three major developments of over 100,000 sq ft which are currently under construction across the UK regions. All three are part pre-let but will begin to deliver speculative space from 2013 onwards.

Nevertheless, the continued weak economic picture and the challenge in securing funding means that schemes are only breaking ground once a proportion of space has been prelet. Even in a market as buoyant and supply constrained as Aberdeen, pre-lets are still required to secure a development start. As such the amount of committed space under construction is limited, as can be seen from the pipeline charts throughout this report. We have sought to flag the key developments we believe will form the next generation of office buildings within each city. Most of these have already secured planning permission, a number have possible funding options. But commitment from occupiers made more confident by economic fundamentals will be key if we are to see these projects delivered.

Towards the end of this report we provide a detailed overview of the development activity across all the regional cities and identify the projects which have the potential to get underway over the next 12-18 months.

3.5

million sq ft

3.0 2.5 2.0 1.5 1.0

1

0.5 0.0

Completed U/C (Pre-let)

U/C (Speculative) Annual Average

> 25,000 sq ft number of buildings above threshold

4.0

Availability of New / Grade A space, Q3 2012 10 9 8 7 6 5 4 3 2 1 0

> 50,000 sq ft

> 75,000 sq ft

No buildings above threshold

Regional Office Completions

Bars show number of properties above given thresholds. Counts for lower thresholds include properties from the categories above. Total include early marketed properties within one year of completion. © 2012, CBRE Ltd.

Q4 2012

THE KEY SCHEMES

OFFICES UNDER CONSTRUCTION

UK Regional Offices | MarketView

Two Snowhill, Birmingham

Atria, Edinburgh

Two Snowhill is the second building on a central Birmingham site close to Snow Hill railway station. The neighbouring building completed in 2009 and counts Barclays and KMPG as its principal occupiers. Following a 2008 pre-let of up to 250,000 sq ft at Two Snowhill by Wragge & Co, development work began on the building. However, early into construction the developer, Ballymore, halted works as it struggled to secure funding when the UK economy slipped into recession.

Initially begun on a full speculative basis, Atria is a 200,000 sq ft office building being developed by The City of Edinburgh Council as part of a project which also sees the construction of an extension to the Edinburgh International Conference Centre. It is the final site in the Exchange District which has seen extensive office development over the last 15-20 years and is home to Standard Life, Scottish Widows, BlackRock and many other major financial and professional services occupiers. The scheme is split into two separate buildings: Atria One is the larger of the two comprising 186,500 sq ft over seven floors; Atria Two is just 13,200 sq ft over two floors. Whilst the project began speculatively it has been able to attract tenant interest, being one of few Grade A buildings available within Edinburgh, a market where very good quality space is increasingly in short supply. Brewin Dolphin was the first occupier to sign, acquiring 47,800 sq ft earlier this year, meaning the space is currently around 25% let.

In early 2011 US developer Hines completed an agreement with Ballymore to jointly develop the building, backed by debt funding from Deutsche Hypo. Work recommenced mid2011 and with completion due in January 2013. The scheme also benefits from being included within Birmingham's city centre wide Enterprise Zone, providing preferential business rates to any business choosing to locate within the EZs boundaries.

Atria is unusual amongst the schemes currently being developed around the UK, in that it is being developed by the public sector and is also part of a wider mixed-use project.

Atria – Key Facts

Two Snowhill – Key Facts

2

Developer

Hines / Ballymore

Total office space

360,000 sq ft

Pre-let space

183,000 sq ft to Wragge & Co

Available space

120,000 sq ft

Typical floorplate

24,000 sq ft

Expected completion

Q1 2013

Developer

The City of Edinburgh Council

Total office space

200,000 sq ft

Pre-let space

47,800 sq ft to Brewin Dolphin

Available space

152,200 sq ft

Typical floorplate

32,300 sq ft

Expected completion

Q2 2013

© 2012, CBRE Ltd.

The most recent major development to get underway in the regional cities is One St Peter’s Square, a 268,000 sq ft scheme in central Manchester being jointly developed and funded by Argent and the Greater Manchester Property Venture Fund (GMPVF). At the end of 2011 KMPG signed a 62,500 sq ft pre-let that secured the start of development, with site clearance beginning in January, paying just under £30 per sq ft, in line with the city’s prime headline rental level. This building is the first stage of more extensive development plans on other nearby sites, which in the long term will significantly increase the quality of the office stock in this part of the city centre.

Whilst the bulk of this report concerns development within the major regional office centres, it is worth highlighting development activity that is currently underway in the South East office markets. Unlike the regional cities, the last 12-18 months has seen a number of schemes in West London and the Thames Valley begin on a speculative basis.

The scheme also demonstrates the relative resilience of the Manchester office market compared to other regional centres. The KMPG pre-let accounts for just under 25% of the total office space, however, there are currently some large requirements for space in Manchester, and if they chose this building the remaining space could be quickly absorbed.

The remaining six buildings that are under construction, totalling 476,000 sq ft, all will add fresh new space to a market which is experiencing declining availability of good quality office accommodation. Many of the developments broke ground in 2011, and are expected to complete before the end of this year. The most recent start, RREEF and Bell Hammer’s 67,000 sq ft Tor scheme in Maidenhead (pictured), is likely to be the last development to start in this short-lived development cycle.

The West London market has been one of the notably stronger office markets outside Central London. Developments in Chiswick (Building 6 at Chiswick Park and Chiswick Green) have begun speculatively and have been able to secure occupiers this year whilst construction was underway.

UK Regional Offices | MarketView

South East Office Development

Q4 2012

One St Peter’s Square, Manchester

Speculative schemes across the South East

One St Peter’s Square – Key Facts

Building

Size (sq ft)

Completion Date

Developer

Hammersmith Grove

110,000

Q3 2013

Development Securities / SWIP

Velocity, Weybridge

103,000

Q4 2012

Rockspring / Exton Estates

Strata, Staines

90,000

Q1 2014

La Salle IM / Bell Hammer

Developer

Argent / Greater Manchester Property Venture Fund

Chiswick Green

81,000

Completed

BAM Properties

Total office space

268,000 sq ft

Q4 2012

Rockspring / Bell Hammer

62,500 sq ft to KMPG

Stanza Building, Uxbridge

80,000

Pre-let space Available space

205,500 sq ft

78,000

Q4 2012

Kames / Capella Estates

Typical floorplate

c. 21,000 sq ft

The Point, Maidenhead

Expected completion

Q1 2014

Flow, Staines (pictured)

60,000

Q3 2013

Rockspring / Exton Estates

Tor, Maidenhead

67,000

Q1 2014

RREEF / Bell Hammer

3

3

© 2012, CBRE Ltd.

With robust demand, driven by expansion within the oil and gas industry, the Aberdeen office market has seen a number of new developments come to the fore over the last 18 months. Any large requirement can now only consider prelet opportunities. As a result new, fully committed schemes are getting underway, including 300,000 sq ft at the Prime Four Business Park at Kingswells. More recently in the city centre, GDF Suez signed a 40,000 sq ft pre-let for a new HQ to be developed on North Esplanade West by Miller Cromdale, close to Aberdeen Harbour. Planning for this scheme has now been obtained and development will commence in early 2013.

Building

Status

Size (sq ft)

Developer

Prime Four Business Park

U/C

300,000

Drum Property Group

The Pinnacle, Shiprow

PPG

100,000

Ardent Group

GDF Suez House

PPG

40,000

Miller Cromdale

Triple Kirks

PPG

72,600

Stewart Milne Developments

Ardent House

PPG

170,000

Miller Cromdale

There are a number of other schemes in the city centre that could be developed out, subject to pre-lets. Triple Kirks is a 72,600 sq ft scheme to be developed by Stewart Milne Developments. Meanwhile, at Ardent Group’s, The Pinnacle, a site between Union Street and the harbour, on Shiprow, a 100,000 sq ft, 10 storey scheme also has planning permission. Other sites include Miller Cromdale’s Ardent House scheme, which was previously under offer to Wood Group for a new HQ pre credit-crunch. Longer term sites in the city centre include a redevelopment of the Bells Hotel on Justice Mill Lane where Titan Investors are looking to develop in excess of 70,000 sq ft. Meanwhile at the other end of Union Street, Aberdeen City Council are currently in the process of selecting a development partner their former headquarters, St Nicholas House. A decision is expected to be made in early 2013.

Aberdeen Office Completions and Pipeline

Birmingham

Key Office Schemes in Birmingham

With 2 Snowhill nearing completion, there is no other major development currently underway within Birmingham city centre. However, there are a number of significant projects likely to enter the pipeline. Two significant schemes of this type have or are becoming vacant following the relocation of major professional services firms. KPMG’s move to One Snowhill has led to redevelopment plans for 2 Cornwall Street being worked up by new owners West Register, whilst nearby AEGON Asset Management have secured consent to refurbish 55 Colmore Row once Wragge & Co make their move to Two Snowhill in 2013/14. Meanwhile, Arena Central has the capacity to offer up to 800,000 sq ft under an outline consent, and is currently looking for pre-lets.

4

Key Office Schemes in Aberdeen

Sites like Arena Central are also tied into the City Council’s Big City Plan. This regeneration and development initiative has further benefited from gaining Enterprise Zone status, targeting key sites in and around the city centre. Not all of these sites are deliverable in the short-term and not all will feature office space. Outline applications are currently being considered by the city council for the most high-profile of these; Paradise Circus which has the potential to deliver up to 1.7 million sq ft of office space, with phased delivery including significant enhancements to the public realm and Snowhill phase 3, around 250-330,000 sq ft of principally offices. Further ahead, there is land at PRUPIM’s Snow Hill Plaza that could accommodate up to 180,000 sq ft.

Completed

U/C (Spec)

U/C (Pre-let)

1,000,000 800,000 sq ft

UK Regional Offices | MarketView

Aberdeen

600,000 400,000 200,000 0 2008 2009 2010 2011 2012 2013 2014

Building

Status

Size (sq ft)

Developer

Two Snowhill

U/C

305,000 (66% pre-let)

Hines / Ballymore

55 Colmore Row

PPG

153,000

AEGON / Abstract Land

2 Cornwall Street

PPG

110,000

West Register

Arena Central

OPPG

800,000

Miller Developments

Paradise Circus

App

1,700,000

Argent / Altitude

Birmingham Office Completions and Pipeline Completed

U/C (Spec)

U/C (Pre-let)

700,000 600,000 500,000 sq ft

Q4 2012

CITY OVERVIEWS

400,000 300,000 200,000 100,000 0 2000 2002 2004 2006 2008 2010 2012 2014

U/C: Under construction PPG: Planning permission granted App: Planning application submitted © 2012, CBRE Ltd.

Status

Size (sq ft)

Developer

One Victoria Street

U/C

47,000

PRUPIM

Two Glass Wharf

PPG

92,000

NFU / Salmon Harvester

Redcliffe Square, St Thomas St. PPG

45,181

Carlyle Group

Redcliffe Square, St Thomas St. PPG

40,254

Carlyle Group

Bank Place 1

PPG

157,965

Carlyle Group

Bank Place 2

PPG

86,867

Carlyle Group

Bristol Office Completions and Pipeline Completed

U/C (Spec)

U/C (Pre-let)

500,000

sq ft

400,000 300,000 200,000 100,000 0 2000 2002 2004 2006 2008 2010 2012 2014

Building

Status

Size (sq ft)

Developer

Atria, Morrison Street

U/C

198,500

City of Edinburgh Council

145 Morrison Street

U/C

26,380

Ediston Properties

City West, Robertson Ave U/C

25,200

J Smart

The Haymarket

PPG

400,000

Tiger Developments

Quartermile 3

PPG

73,000

Gladedale Capital

Quartermile 4

PPG

127,700

Gladedale Capital

Caltongate

Site

160,000

Artisan Real Estate

Edinburgh Office Completions and Pipeline U/C (Spec)

U/C (Pre-let)

1,000,000

sq ft

800,000

5

600,000 400,000 200,000 0 2004

2006

2008

2010

As these schemes have completed relatively recently, there has been no further development activity taking place in Bristol. Nevertheless there are some key schemes that could be developed, given a major pre-let of increased demand and letting in neighbouring buildings. This includes Salmon Harvester and NFU Mutual’s Two Glass Wharf located in the newly created Temple Quays Enterprise Zone. This 92,000 sq ft scheme could be the next speculative start in the city, particularly if nearby developments at Bridgewater House and Temple Back start to see increased demand. Speculative refurbishment has however recently started at Prupim’s One Victoria Street. The building is undergoing a comprehensive refurbishment and extension programme to create 47,000 sq ft of prime Grade A space, due for completion in late 2013. Meanwhile HDG Mansur’s Temple Building at Finzels Reach (the ‘sister’ site to Bridgewater House) has also secured planning permission for 165,000 sq ft of office accommodation. We do not anticipate this building to start on a speculative basis however as the developer is likely to wait until Bridgewater House is fully let before proceeding, and even then a pre-let may be required. Edinburgh

Key Office Schemes in Edinburgh

Completed

Unlike many other of the regional cities, Bristol continued to see speculative development activity taking place over the last two years. This process concluded earlier this year with the completion by Crest Nicholson of 2 College Square. Half of this building (25,000 sq ft was pre-let to CMS Cameron McKenna.

2012

2014

The major development currently underway in Edinburgh is the Atria scheme, described in detail on page 2, which whilst being started speculatively, has begun to attract occupiers. However, there are a handful of smaller developments currently taking shape across the city. Very close to Atria, Ediston Properties is currently developing 145 Morrison Street which is due to deliver 26,380 sq ft of office space in the summer of 2013. This is a relatively small building that can provide accommodation of around 5,500 sq ft on each floor. Elsewhere local developer J Smart is developing a 25,200 sq ft building on Robertson Avenue, to the west of the city centre and outside the traditional Edinburgh office district. This scheme, City West, will have an average floorplate size of c6,500 sq ft. Despite this activity, we still expect Edinburgh to experience a shortage of supply, made more noticeable this year following the acquisition of 80,000 sq ft by BlackRock at Exchange Place 1. This has reduced the number of Grade A buildings able to accommodate such space to just two. There a number of larger scale developments that pre-date the market downturn but are still likely to emerge in the longer term. These include Tiger Development’s Haymarket scheme and Artisan Real Estate’s Caltongate development in the Old Town. Both are mixed use schemes with a potential 400,000 sq ft at Haymarket and 160,000 sq ft at Caltongate. There are also two final buildings at Quartermile that have office consent, as does 6 St Andrew Square where Peveril Securities have permission for up to 100,000 sq ft. All will require pre-let commitment before development would commence.

U/C: Under construction PPG: Planning permission granted App: Planning application submitted © 2012, CBRE Ltd.

UK Regional Offices | MarketView

Building

Q4 2012

Bristol

Key Office Schemes in Bristol

5

UK Regional Offices | MarketView

Office development in Glasgow has been in modest amounts over recent years, following a big spike in completions in 2009. So far this year the only remaining speculative building in the city has completed, the 65,000 sq ft Copenhagen Building on Hope Street (now rebranded as Sixty7). This was a refurbishment of two neighbouring buildings which began in 2008 but had been on hold for a number of years as the original developer went into administration. Glasgow is anticipated to see the return of development with the first speculative building to start in over three years, and the only regional city with a speculative scheme that is likely to start in early 2013. St Vincent Plaza, an Abstract Securities scheme close to the Glasgow Hilton, will bring an additional 175,000 sq ft of much needed Grade A supply to this market, once complete. The building is located in the core Central Business District and will have average floorplate sizes of 17,000 sq ft. There is also a further c.550,000 sq ft of office schemes with planning consent, although many of these will require a large pre-let before building will commence. The most recent of these to receive planning permission was Mountgrange’s / Prupim One West Regent Street.

Key Office Schemes in Glasgow Building

Status

Size (sq ft)

Developer

St Vincent Plaza

PPG

175,000

Abstract Securities

Broadway Two

PPG

151,300

IVG / Ediston Properties

110 Queen Street

PPG

143,000

BAM Properties

One West Regent Street

PPG

139,333

Mountgrange / Prupim

Atlantic Square

PPG

120,700

Capella Group

Glasgow Office Completions and Pipeline Completed

Spec

Pre-let

800,000 600,000 sq ft

Q4 2012

Glasgow

400,000 200,000 0 2000 2002 2004 2006 2008 2010 2012 2014

Leeds

Key Office Schemes in Leeds

Looking further ahead there are two new builds which could form the start of the next development cycle in this city. An ‘exclusivity’ contract is in place between KPMG and Leeds City Council at the Criterion Place site on Sovereign Street (a JV with BAM), which will lead to the delivery of the first phase at this site, a 53,000 sq ft stand-alone building. There is a further 150,000 sq ft potential new build on the neighbouring site however the council is seeking a development partner and potential occupier before proceeding.

6

There is also rumoured to be upwards of 90,000 sq ft under offer at McAleer & Rushe’s City Square House site, a possible 173,500 sq ft project. However the potential tenant is after a stand-alone building meaning even if the deal does get signed it’s unlikely to bring any new, prime, Grade A availability to the market.

Building

Status

Size (sq ft)

Developer

100 Wellington Street

U/C

33,500

Bruntwood

21 Queen Street

U/C

37,490

Formal Investments

Criterion Place, Sovereign St

PPG

220,000

Leeds City Council

City Square House

App

173,500

McAleer & Rushe

City House

PPG

117,300

Bruntwood

Leeds Office Completions and Pipeline Completed

U/C (Spec)

U/C (Pre-let)

600,000 500,000 400,000 sq ft

The Leeds development market has most recently been characterised by refurbishments of small office buildings within the city centre, although this follows a healthy ‘boom’ period between 2005-09 when 1.7m sq ft of space completed in city centre. The most recent of these refurbishment projects includes 100 Wellington Street (West One) where Bruntwood is undertaking a major refurbishment of the entire 33,000 sq ft and is expected to complete in autumn 2012. The refurbishment of 21 Queen Street (formally Prince William House) is also in progress by Formal Investments delivering 37,490 sq ft through the addition of two extra floors.

300,000 200,000 100,000 0 2001 2003 2005 2007 2009 2011 2013

A further 154,000 sq ft of major refurbishment projects look likely to be the next to start in the city centre, at 1 Aire Street (Network Rail) and City House (Bruntwood). U/C: Under construction PPG: Planning permission granted App: Planning application submitted © 2012, CBRE Ltd.

Status

Size (sq ft)

Developer

The Department, Central Village

U/C

75,200

Merepark

Princes Dock, Liverpool Waters

PPG

500,000

Peel Developments

Pall Mall

PPG

299,000

HCA

Liverpool Office Completions and Pipeline Completed

U/C (Spec)

U/C (Pre-let)

500,000

sq ft

400,000 300,000 200,000 100,000 0 2005

2007

2009

2011

2013

Key Office Schemes in Manchester Building

Status

Size (sq ft)

Developer

One Angel Square, NOMA

U/C

320,000

Co-Operative Group

One St Peter’s Square

U/C

270,000

Argent / GMPVF

Citilab, Oxford Road

U/C

94,000

Bruntwood

Brazennose House

PPG

150,000

PRUPIM

i+, Spinningfields

PPG

160,000

Allied London

3 St Peter’s Square

PPG

110,000

AXA Real Estate

First Street

PPG

50,000 +

Ask Developments

City Wharf

PPG

100,000

McAleer & Rushe

Greengate, Salford (OOT)

PPG

165,000

Aks Dev’ts / Network Rail

Manchester Office Completions and Pipeline Completed

U/C (Spec)

U/C (Pre-let)

700,000 600,000

7

sq ft

500,000

Looking further ahead, both banks of the Mersey (Birkenhead and Liverpool docks) were awarded Enterprise Zone status in 2011. These two locations are also subject to large scale redevelopment proposals by Peel Group who own large tranches of these former docklands areas. The Liverpool Waters development covers over 150 acres and is a mixed-use scheme which includes offices. The main office component will be at Princes Dock where there is planning permission for c500,000 sq ft of office accommodation. The entire scheme covers over 14.2m sq ft of proposals and will take 30-40 years to complete. When and how it eventually kickstarts is subject to much debate but this is certainly the most extensive and substantial development project in the long-term pipeline for the Liverpool area.

Manchester Of all the big regional cities in the UK, Manchester has undoubtedly seen more cranes on its skyline in recent years. Activity has been led by the Co-Operative, who are developing a new HQ on their NOMA site. The new building, One Angel Square, is now being offered to the investment market as a sale and leaseback opportunity. Elsewhere, Argent and the Greater Manchester Property Venture Fund are underway with their pre-let driven One St Peter’s Square scheme (see page 3 for more details). Bruntwood have also started on Citilab, a redevelopment of Manchester’s former Royal Eye Hospital. This 94,000 sq ft development on Oxford Road is being redeveloped as a biomedical centre, with space specifically targeted at companies in this field. So far 40,000 sq ft has been pre-let by ICON, a biomedical R&B company. Over the last 12-18 months there have been a number of schemes that have received planning permission, many of which are being brought forward by institutional investors. These include PRUPIM’s plans to redevelop Brazennose House on Lincoln Square to replace a tired 1970s office block and AXA’s scheme at 3 St Peter’s Square, redeveloping Peterloo House to provide 110,000 sq ft. Meanwhile at Allied London’s Spinningfields scheme, a further phase is now proposed comprising 160,000 sq ft to be called ‘i+’. Manchester also has a number of other long-term office led projects including further plots at NOMA, as well as Ask Development’s First Street project near Deansgate station and their Greengate Embankment site near Manchester Victoria station. All of these projects can accommodate and will be seeking larger requirements.

400,000 300,000 200,000 100,000 0 2000 2002 2004 2006 2008 2010 2012 2014

U/C: Under construction PPG: Planning permission granted App: Planning application submitted © 2012, CBRE Ltd.

UK Regional Offices | MarketView

Building

The completion of the 109,449 sq ft 4 St Paul’s Square speculative scheme in 2011 marked the end of Liverpool’s most recent development cycle. Nevertheless, Liverpool does have one speculative scheme which is part of a comprehensive redevelopment project. The Department, located just outside the traditional office core near Liverpool Central station, is the former Lewis’s department store. The building is being redeveloped to accommodate just over 75,000 sq ft of office space. This Merepark scheme went under construction in Q2 2012 and is due to complete by the end of this year.

Q4 2012

Liverpool

Key Office Schemes in Liverpool

7

UK Regional Offices | MarketView

Development activity in Southampton in recent years has been primarily focused on the out-of-town market with major pre-let or purpose built schemes. These have included new headquarters for Ordnance Survey at Nursling, B&Q at Eastleigh and Hampshire Police on Southern Road. The last building to complete in the city centre was the Regional Business Centre, a 67,700 sq ft scheme pre-let to Capita and Southampton City Council. Since then there has been no office space under construction, and new development is currently unlikely without a pre-let in place. The one major scheme that came forward prior to the property market downturn, Mayflower Plaza, will now proceed as a student housing scheme. The downturn has also led to a challenge for developers following the slump in rental values. At £18 per sq ft rents are currently under the threshold which would make a new scheme viable. There would need to be a significant premium on existing space pushing rents in excess of £2223 per sq ft before new developments would become feasible to landlords. However, two fresh schemes have now come forward to provide the next generation of space for the city. At West Quay, Development Securities have plans for the 60,000 sq ft Aqua scheme, with typical floorplates of c.10,000 sq ft. Meanwhile local developer Cumberland Commercial are bringing forward their 157,000 sq ft scheme called The Bond, located on a prime city centre site.

Key Office Schemes in Southampton Building

Status

Size (sq ft)

Developer

The Bond, Cumberland Place

PPG

157,000

Cumberland Commercial

Aqua, West Quay

PPG

60,000

Development Securities

New College Site, The Avenue

PPG

60,000

Linden Homes

Southampton Office Completions and Pipeline Completed

U/C (Spec)

U/C (Pre-let)

300,000 250,000 200,000 sq ft

Q4 2012

Southampton

150,000 100,000 50,000 0

8

U/C: Under construction PPG: Planning permission granted App: Planning application submitted © 2012, CBRE Ltd.

Q4 2012

CONCLUSIONS The influence of ongoing economic uncertainty continues to cast its shadow across the UK office markets, and this is clearly reflected in the level of development activity currently taking place. Despite some resurgence in speculative development and a modest number of small refurbishments, the amount of space under construction is exceptionally low compared to historic levels. In addition current rates of construction are also very low compared to the Central London office market. The key trigger to greater levels of development will be a tangible improvement in economic conditions and with this renewed business confidence and occupier demand. In late 2010 / early 2011 confidence was undoubtedly stronger, and it is no coincidence that at that stage a development such as Two Snowhill in Birmingham was restarted and a handful of Thames Valley schemes began on a speculative basis. However, there are other factors and challenges that will face developers looking to deliver new stock into the regional markets. Securing pre-lets Virtually all the developments currently under construction have required the security of future income that comes with a pre-let. The proportion required for a development to commence will vary, dependent on the nature of funding, the dynamics of the local market, and the developer’s expectation on the trajectory of recovery. Recent examples range from Two Snowhill, Birmingham (60% pre-let) to One St Peter’s Square, Manchester (24% pre-let). In the Autumn Statement, the Chancellor announced plans to exempt new build developments completing between October 2013 and September 2016 from empty rates for 18 months. This will be a help, but pre-lets will still be required amidst other costs incurred by developers. Build costs The onset of the recession has been felt particularly hard in the construction industry. Construction output is almost 16% down on pre-recession levels, compared to 3.1% for the economy as a whole. UK Office Completions and Pipeline Central London

Thames Valley / M25

In turn construction costs have been steadily falling in recent years, with labour and material costs both declining over the course of the last 12 months. For example, according to BCIS, the median build cost for a 6 storey air-conditioned office in Northern England is currently £132 per sq ft gross, down from £150 per sq ft five years ago. Their forecast suggest that build cost inflation will remain sluggish in the short term, only reaching £153 per sq ft by 2017. Rental levels Whilst pre-lets will be a prerequisite for any large scale development, the additional challenge will be securing a future occupier at a rental level sufficient to meet the target development return. Many cities have seen a significant correction in headline rental values since 2007, with minimal rebound since. However, of greater interest to a developer and their funders is the movement in net effective rents. Even where there has been modest rebound in headline rents, lease incentives remain very generous. As such net effective rents remain significantly below their 2007 peak levels, and in many cities below the £20 per sq ft mark, a threshold needed as an absolute minimum to makes schemes viable. Funding The ongoing hurdle remains access to funding for developments. Whilst it is difficult to observe a widespread trend in funding options, many recent developments have been undertaken with a joint venture equity partner. This is true of most of the schemes started since 2010 across the South East as well as One St Peter’s Square where the Greater Manchester Property Venture Fund is providing funding. Not only does this help bankroll schemes, but it also helps to spread risk exposure for an individual developer. There is therefore further potential to see equityrich funds enter the market, should occupier fundamentals improve. Debt funding for development remains very limited. Many lenders have strict requirements, including a high proportion of space pre-let, a viable prime net effective rent and a loan to costs ratio of at least 50%. Regional Tender Price Index All TPI

Regional Cities Index (Q4 2007 = 100)

millions sq ft

9

12 10 8 6 4 2

Rest of UK TPI

105

16 14

100 95 90

9

85 80

0 2000 2002 2004 2006 2008 2010 2012 2014

Source:CBRE Research

© 2012, CBRE Ltd.

UK Regional Offices | MarketView

Development in Context

2007

2008

2009

2010

2011

2012

Source:BCIS

Q4 2012

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For more information about this Local MarketView, please contact: UK Research Andrew Marston Director UK Research CBRE Henrietta House Henrietta Place London t: +44 (0)20 7182 3907 e: [email protected]

Leslie Schroeder Senior Analyst UK Research CBRE Henrietta House Henrietta Place London t: +44 (0)20 7182 3551 e: [email protected]

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Global Research and Consulting This report was prepared by the CBRE UK Research Team which forms part of CBRE Global Research and Consulting – a network of preeminent researchers and consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe. Disclaimer 10

CBRE Limited confirms that information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt their accuracy, we have not verified them and make no guarantee, warranty or representation about them. It is your responsibility to confirm independently their accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.

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