07 April 2015
With the UK economy looking up, Malcolm Grayson, Director of leading East Midlands commercial property specialist Andrew and Ashwell, presents an overview of the current, regenerating Leicestershire scene, revealing growth across all sectors.
Q What’s happening within the current market?
Commercial property has followed the pattern of the wider economy, reaching a peak in 2007 and then falling into recession, with property values following a similar rise and fall.
In the last 18 months there has been an increase in demand, as confidence has returned to the economy. This has risen even more rapidly over the past 12 months and we are continuing to see successful sales and lettings.
Q With rising optimism, what is the level of supply across all sectors?
The difficulty is that the supply side has frozen, with no new development since 2007 across any of the commercial property sectors. Eight years without a new supply of stock means most of the existing stock has now been absorbed and prices of what is available are therefore rising.
Industrial
The industrial sector is traditionally one of Leicestershire’s most stable and there was no significant over supply when the market crashed. This has been the first sector out of recovery too so we have really noticed an increased pressure on prices during the past 18 months, particularly for freehold property, which is at a real premium.
Retail
In recent years there has been a greater supply of buildings to the market because of issues with Internet buying affecting shopping trends to the detriment of the high street. There is clearly a recovery underway which is showing a growing take-up although the retail pitch is consolidating and this sector is recovering in more defined areas.
Office
Prior to 2007 values were rising strongly in the office sector. Capital values increased very rapidly in the years before 2007 in response to demand, fuelled by investors wanting to supply property for renting. With investors piling into the market office values went from £100 to £180 per sq ft within a two or three year period, with good returns and windfall profits. Consequently developers were building a lot of office units and supply was at its height when the market crashed. Then during the banking crisis both funding supply and investors withdrew. Demand reduced due to the recent oversupply and it therefore became the weakest sector during recession. Values were hit hard and it has taken a longer time to recover although recovery is evident.
Q What else changed?
A key factor in the rate of recovery has been the government introduction of major increases in business rates, which further deterred investors and developers.
Rating assessments were set for 2008, when rents were at their highest. This led to a ridiculous situation in which some occupiers were paying as much on rates as rent. While rental values may have grown in London, they have fallen back in the regions.
Q What are the prospects for new development?
The cost of building new commercial property has increased, mainly because the residential market has recovered through incentives to build new homes. Contractors have had a hard time of it throughout the recession and prices of materials have risen in the interim, with a knock-on effect for new commercial development too.
Looking at costs, you are likely to get a 25 per cent return on a residential scheme, compared with only six to seven per cent on a commercial one. The build costs of a new industrial unit are currently substantially more than buying a second-hand building and fitting it out. The value of the resulting new property could, be less than the construction cost.
Q Have values risen?
In the last 18 months the values of industrial premises have risen modestly, from a base point of £50 to £55 per sq ft, to £80 to £85, but this needs to recover to a around £100 per sq ft for developers to get involved.
The market is moving in the right direction and will ultimately create development because values are pushing up. Values and rentals will have to increase, or there will be no supply. Rentals are lagging behind however, because there is greater supply.
The market is currently tight, but both volume and demand are good. It’s the supply side where we have an issue.
Q When will we see evidence of new schemes?
There are many positives going ahead for the next six to 12 months, with considerable confidence in the market. There is an expectation of growth in values, coupled with renewed availability of funding to buy property that will help push up values.
Developers are looking to start building and while the prospect of any profit is marginal at the moment, the signs are positive. However, it will probably be 12 to 18 months before anything comes out of the ground.