Market snapshot

Bristol Office Market Pulse Q2 2016

Strong take-up has continued into Q2 but figures have been skewed this quarter by one key deal, Direct Line’s purchase of 63,000 sq ft at the Core.  There have been a large number of deals on smaller spaces with the majority taking less than 5,000sq ft, which has put pressure on the supply of small suites.

Looking ahead, we expect higher take-up this year than 2015, both in the city centre and out of town, but it will not reach the level seen in 2014.

The occupier market is yet to feel the effects of BREXIT and we wait to see how the market will react, if at all.

In this issue:

Enquiries in Q2 down on Q1 2016

  • There were 44 new office enquiries in Q2 2016 – a return to average levels from Q1
  • The large majority of enquires have been for space less than 5,000sq ft.

After a strong first quarter this year, this return to average enquiry level was expected. Improved growth in the economy resulted in positivity amongst occupiers in the early part of the quarter, but we saw a subdued market in the run up to BREXIT and since the referendum result, with many firms deciding to wait to hear the result before making any decisions.

Take-up levels distorted by one key deal

• Total take-up of offices (over 1,000 sq ft) in Q2 2016 was 246,392 sq ft, compared with 225,555 sq ft during the same period in 2015
• Total take-up in H1 2016 is up by 13% on the same period for the previous year

This continued increase of take-up means that the yearly take-up so far is now more than 100,000 sq ft ahead of the same six months last year. The out of town market has continued to remain at average levels whilst the city centre has performed above expectations, producing the highest Q2 take-up since 2011.  Part of this can be contributed to Direct Line’s purchase for its own occupation as mentioned above, which accounted for the city centre’s entire grade A take-up in this quarter.There are currently several other grade A suites under offer which are expected to complete early in Q3; however, the majority of take-up has been within the grade B market, which continues to perform well. The UK’s recent decision to leave the EU is yet to have a true impact on the occupier market, but we do expect to see changes through the next quarter. There is already mention of some requirements being put on hold and it will be interesting to see if this impacts take-up in Q3.

Supply profile continues to tighten

Q1 2016 saw construction work start at two sites within the city centre: Aurora and Aspire; however, we are yet to see work start on other sites. There are several allocated sites within the city centre that are starting to push themselves to the market, although none are being built speculatively just yet.

The supply of ‘quirky’ space, typified by exposed services and unusual features, has been popular with tenants from the technology, media and telecommunications (TMT) and creative sectors. Landlords are recognising this and during refurbishment works are often offering the option to occupiers.

The grade B market has continued to perform well with ever increasing rents and falling tenant incentives. Several schemes have either been refurbished, or are being refurbished, to a high standard and landlords are reaping the rewards whilst the supply profile continues to limit occupier’s choice.

Prime rents remain unchanged; however, due to the ever decreasing supply of grade A space we continue to expect rents to break the £30.00 barrier later this year.

Significant occupational transactions

Property Size (sq ft)  Landlord  Occupier  Lease Length  Rent (per sq ft) / Price 

The Core

63,123 Direct Line Direct Line Freehold £15.20 million
4th Floor, 1 Temple Way 10,789 Hamsworth Pension Fund Trustees Ltd Desk Lodge Ltd 10 year lease with a break in year 3 £13.00
3rd and 4th Floor, Berkeley Square 10,593 Head Tenant - JLL Bristol University Sublease expiry September 2017 £14.90
1 Rivermead Court, Clevedon 18,562 Private individual CableCom 10 year lease with a break in year 5  £13.50

Office investment market review

• South West investment as a whole totaled £407m in Q2 2016, which was 10% down on the previous quarter but still 28% above the five-year average.

• Investment into South West offices totaled £137m for the quarter, which was 9% less than Q1 2016 (at £150.3 million).

• Across the UK, Q2 2016 saw a marked decrease in investment volume as the Brexit Referendum approached.  At £9.8 bn it was down 18% from Q2 2015 (£11.9 bn).  Compared to the same period last year it was down 45% (£17.8 billion).

The second quarter of 2016 saw a marked slowdown in office investment activity from Q1, caused by nervousness around the result of the Brexit.  Large numbers of funds slowed or even completely stopped their acquisition programmes as they saw a need to hold cash to deal with the increasing levels of redemptions they were facing as the referendum approached.

In the immediate period post-Brexit, following the initial shock affect on the financial and property markets, we are beginning to see signs of a return of confidence in the sector.

As a result of negative publicity towards commercial property, several of the largest retail pension funds were forced to halt redemptions in order to protect their liquidity.  We have already seen an announcement from Aberdeen Asset Management that they have re-opened the door to investors to withdraw their funds, albeit in order to prevent a flood of withdrawals they have reduced the value of their funds by 17%.  It is likely that other funds will follow suit shortly.  Once the market sentiment recovers and the flow of redemptions slows then these funds should recover their values.

After a brief period of catching their breath post-Brexit, a large number of funds remain active investors and we have seen healthy demand from property companies and private investors.  Some overseas investors were initially cautious about the market but we are seeing an increasing number looking to buy now attracted by the shift in exchange rates.

Whilst some transactions have fallen away since the referendum, the majority remain on track. The most significant transaction to happen post-Brexit was the sale by British Land of the Debenhams store in Oxford Street London for £400 million to an overseas investor.  The sale reflected a net initial yield of 2.6%.

We anticipate that whilst prime properties should hold their values, there may be some short term price adjustments of between 5-10% for more secondary properties. However, we believe prices should correct in the latter quarter of 2016, as long as the occupational market remains strong while the market becomes more acclimatised to the UK’s decision to exit the EU and the Government puts the process in motion.

Key investment deals

• The only significant City Centre office transaction in Q2 was the sale of The Core in St Thomas Street. The 65,000 sq ft building was bought for £15.20 million by Direct Line for its own occupation.  The sale price reflected an initial yield of 4%, although this was due to the building having only one floor occupied on a short lease at the time of sale.
• By contrast, there were 5 out-of town offices sold.  The most significant sale was of 2000 Aztec West which was let to Everything Everywhere for a further 11 years.  The property sold in June for £19.90 million reflecting a net initial yield of 6.30%.

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Peter Musgrove

0117 914 2013

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Peter Musgrove
Director - Head of Office - Bristol

0117 914 2013

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