Welcome to the ‘new normal’

Mike Stephens, Martin Guest and Peter Damesick, speakers at CB Richard Ellis's Midlands Market Insight Seminar

Stock in the Midlands industrial and distribution market is drying up, according to experts at property consultancy CB Richard Ellis, thanks to strong take-up in the last quarter of 2009 and first quarter of 2010.

At the firm’s Midlands Market Insight Seminar, local property developers heard that industrial enquiries are also reducing, so rents are unlikely to start moving upwards until 2012.

Mike Stephens, valuation advisory director at the firm’s Birmingham office, told the audience: “There are active enquiries from retail/logistics operators, including Marks and Spencer, Tesco and Ocado. They are all looking for design and build solutions, which frankly is the way the market is going. There is no sign of speculative development on the horizon whatsoever.”

Birmingham’s office market is also unlikely to see any speculative development, thanks to a surplus of Grade A space.

The market has also become overly reliant on the public sector, which accounted for 50 per cent of office take-up in the city in 2009.

The scale of government and local authority cut-backs clearly means that this is unsustainable, according to Mike Stephens.

He said: “There is a short-term moratorium on new government leases, which means the much hoped for exodus of civil servants from Whitehall to the regions is no longer anticipated, at least in the foreseeable future.

“What’s more, the Smith Report (Relocation – Transforming Where and How Government Works) appears to have pitted the regions against one another, with different regional centres promoted as ‘hubs of excellence’ for different public sector specialisms

“Hopes are now pinned on the private sector taking up the city’s surplus of Grade A space. There will be a flight to prime space as corporates consolidate, but rents are unlikely to reach their £33 psf peak until stock reduces. There are already signs, however, that the market is stabilising.”

Investment activity in Birmingham and the region is likely to pick up in the latter half of the year.

Mr Stephens predicts that the UK institutions will be the most active players. The German funds, the dominant purchasers last year with the acquisition of One Snowhill and 2 St Philips Place, are likely to scale back.

He said: “The Germans have raided the best stock but current exchange rates won’t be helping their cause. Their exit leaves space for the UK institutions, who I anticipate will become highly active at the back end of this year.

“Their focus will be on less risky assets – leases of ten years plus. They will be shopping for lot sizes of £15-40 million, and focussing on prime assets in traditional sectors.”

Peter Damesick, CBRE’s head of UK research, said that after a volatile couple of years, the property market was starting to acclimatise to a ‘new normal’.

He said he didn’t anticipate a “double dip” in the economy, though there would be a few “dips in the road”.

He added: “Things are starting to settle down and we are beginning to get a flavour of how the markets are shaping up.

“Value rebounds are fading; debt unwinding will take some time; there will be a greater differentiation between local markets and property assets; development opportunities will start to emerge as supply shortages increase; rental growth prospects are variable. This all adds up to a positive medium-term outlook for property returns. Welcome to the ‘new normal’”.

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