The Property Report

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The office property market is a huge, complex machine. Money, lots of it, goes in one end. The office market accounts for the lion’s share of the £55-60 billion a year that goes into UK commercial real estate, and much of it is overseas. Out of the other end, the market extrudes new and refurbished office buildings. But the complex mechanism between money and office building is far from clear. Subtle shifts in the internal dynamics can lead to wild swings in the output of new and refurbished floorspace. 

Our annual property report gives a unique and up-to-the-minute view from key protagonists, from right across the commercial property spectrum. 


The Big Money Investor: Barings

The Barings name is resonant: it suggests old money and big international interests. Today Barings Real Estate, part of Barings LLC, is one of the world’s largest diversified real estate investment managers. The overall Barings empire manages £250 billion or more – these people are serious players. In the UK office market, their holdings are more modest, but growing, valued at around £350 million, excluding the 180,000 sq ft Landmark speculative office scheme currently under construction in Manchester (above). 

Ian Mayhew is Managing Director, Real Estate Asset Management at Barings. He says that, in common with many of the industry’s moneybags, they are thinking more closely than ever about office design. 

‘We have always been selective in what we buy into, but on the other hand we are never not in the market – we are always looking for opportunities where schemes have been mispriced, or our skills can address issues that might have affected value,’ he says. 

Those value issues centre on what Mayhew calls the ‘touchy-feely’ design agenda. More light, cool use of older buildings…these are what Barings likes to do. Roof terraces at 220 St Vincent Street, Glasgow, are a case in point. ‘It’s the kind of edge that occupiers want,’ he says. 

Barings may have billions in reserve, but like all seriously monied operations they are very good at minding the pounds and pence: the Glasgow refit came in at £250,000, roughly equivalent to half a year’s rental income on the building, which in property investor terms makes them super-efficient. 

But beware of making generalities about players like Barings. They act for a large number of funds and wealthy investors, some of them in-house funds, and not all of those funds are keen on risk. 

‘What we do depends in the end on what the client we are acting for wants. Some want core office markets, stable but with lower returns and lower risk, others want value-adding opportunities with greater risk, like we have at the speculative Landmark development,’ says Ian. 

The Canny Regional Investor: M7 

M7 Real Estate is a pan-European investor and asset manager specialised in multi-let properties, whether these are office blocks or industrial parks. M7 manages a portfolio of c.1,400 assets, comprising 115 million sq ft of GLA, with a capital value of €8.1 billion. And in the UK they like to buy in the regions. Indeed, one of their main rules-of-thumb is not to buy in London, which they think is overpriced. 

What they want is regional office blocks to buy – and that is exactly what they are not getting. M7 Director and Head of UK Real Estate, John Murnaghan, explains: ‘Owners are not under any pressure to sell, because the banks are not enforcing loan covenants (which indicate that a loan ought to be a certain per cent of the value of the building) and institutions have no large queue of people wanting their money back. That’s because everyone is waiting for Brexit, so the normal churn of the market, the normal supply of buildings to buy, isn’t there.’ 

When they do buy, M7 have a very simple rule: pay less for the building than the cost of replacing it from scratch. Not only does it mean they have almost automatically made a profit, but it means nobody else is going to build new blocks, which would compete for tenants with their own (because it would make no financial sense). 

Having bought, M7 refurbishes. ‘Regional office refurbishments have been getting more expensive. When the rent is £10-20 a sq ft, a decent refurbishment will cost £30 a sq ft, so you are basically sacrificing 18-24 months rent,’ says John. 

That’s a big cost, relatively speaking, but John insists it is now necessary in the regional office markets. ‘The old adage used to be keep it as simple as possible, a clean bright space, whitewashed walls, which offend no one – but not any more in the UK’s regions, even with lower-cost floorspace. You need a more contemporary look, and amenities like showers, cycle storage, gyms – that’s a huge factor. It isn’t so much more expensive for us, but it does take more time thinking about what lighting we need, what kind of art we need on the walls,’ he says. 


The International Investor: Ekistics 

Exchange Quay is one of the largest office developments in the North West: 3,000 people working from the six buildings in Salford Quays. But this little piece of Salford is controlled from Vilnius, the capital of Lithuania, thanks to Ekistics and their partners. 

Speaking exclusive to Mix, Ekistics analyst Mantvydas Janciauskas says cross-border investment is, more than ever, driven by the wellness and workplace trends that matter to occupiers. And that means amenity, fit-out and styling. 

‘Today, an increased focus is being placed by companies on attracting and retaining talent within their work pool – particularly as we move increasingly towards a knowledge-based economy with a highly sought-after and, at the same time, increasingly flexible workforce,’ he says. ‘In this context we, as property owners, observe that the quality of both physical workspaces, as well as the environments in which these are located, are growing in significance. Companies renting office space these days are increasingly aware of the connection between location and business impact, particularly as it relates to their HR strategies.’ 

As a result, Ekistics’ strategy is focussed on delivering what occupiers need. ‘We want to help them by creating and providing attractive, cost-efficient office space that combines both a high physical quality and a high ‘feel-good factor’ in the shape of strong and attractive amenities, social activities and community building,’ Mantvydas says. 


The Regional Broker: OBI 

There is alchemy in the work of the regional office brokerage businesses. Thanks to their close relationship to local landowners, developers, funders and office occupiers, they are often best placed to bring together the ingredients that produce new office floorspace. They also know what has worked and what hasn’t worked in their market at the granular level of sites and streets – outsiders struggle to acquire that kind of textured grasp of what’s going on. 

OBI is one of the largest independent regional brokers in the UK, with its feet firmly planted in Manchester’s boom office market. Last year OBI was responsible for 42% of total workspace space transacted, which included 102 new lettings, equating to 726,943 sq ft, including, who took 225,000 sq ft and was the largest letting in Manchester city centre for 16 years. 

They also project manage office schemes, the latest being the phased refurbishment of Lancaster Buildings, Manchester, on behalf of BCL Legal. 

Paul Mills, transactions and asset management specialist at OBI, says he expects a lot more flexible workspace to be delivered during 2019. 

‘We expect this sector to grow further in the city in 2019 as operators look to capitalise on the workplace revolution taking place. These design-led managed workspace schemes have become increasingly advanced,’ he says. 

‘The challenge facing landlords and developers is how they adapt their conventional leasing and development/refurbishment approach of their assets to meet this new demand. A number of landlords within Manchester city centre have realised that the ability to provide a range of workspace solutions and increased amenities, to create an eco-system of occupiers throughout an asset, is an attractive solution. 

‘Funds and property companies are also reacting to the threat of managed workspace, and we are seeing an acceleration in the merging of managed and conventional workspace, with landlords undertaking speculative fit-outs, providing space in an enhanced CAT A or CAT A+ specification.”’ 

Data from Savills Workthere supports the idea of hybrid offices, backed by venture capitalists who are chasing the growing businesses that nest in flexible workspace. According to the latest research from Workthere, major cities outside of London saw a sharp rise in venture capital investment in the final quarter of 2018, rising by 26% to £1.1 billion. A key accelerator of growth, including headcount and expansion, the flexible office specialist expects this increase in financial firepower to drive demand for flexible office space. Newcastle saw the biggest rise of 285%, followed by Oxford (131%), Cardiff (52%), Bristol (50%) and Cambridge (33%). 

Workthere expects that those cities, such as Bristol, Manchester and Cambridge, that have seen increased VC investment and are already on the radar of major brand providers, will continue to see good levels of take-up from serviced office providers as they look to expand their presence and capitalise on the areas with fast growing companies that have seen investment flows. This will inevitably enlarge and develop the flexible office offering in those markets, they say.


The National Broker: Cushman & Wakefield 

Cushman & Wakefield are among the biggest rainmakers in the UK property business, although Head of Midlands Office Agency, Scott Rutherford, doesn’t particularly like the expression. 

The Cushwake house view of the 2019 office market is that supply, which is short everywhere, is what determines the market. ‘Everywhere is impacted by generationally-low levels of supply of new office space. It is driving every market, from Edinburgh to Bristol. That is pushing rents up but, more importantly, it is also forcing occupiers to act now, quickly, before someone else takes the floorspace,’ he says. 

Cushwake data shows that occupier horizons have now moved from 18-24 months to a mighty 4-5 years as they learn to plan ahead for their office needs. With such short supply, planning ahead is the only viable option. 

‘We will see new office space developed – look at the 900,000 sq ft coming to Birmingham, and more to Edinburgh and Manchester – but in 2015-16, when the decisions were taken to build, there wasn’t so much confidence, so supply is not enormous and will stay tight,’ Scott explains. 

Behind the shortage of supply is a funding market that means however gung-ho developers feel, the investors who put up the cash feel much less chipper. ‘The funders are still very careful. There are some out there, and more are entering the funding market in the regions, but it is still limited,’ Scott says. 

For brokers like Cushman & Wakefield, success is more than ever about robust research and data analysis: that is what funders want to read, and developers want to believe. ‘More than ever, property brokerage is a numbers game,’ says Scott.

Property Investment


Leigh Dimelowbw

Leigh Dimelow, Principal Director, tp bennett
The key elements I believe are helping transform future real estate are:
1. Smart building technology and digital connectivity, which allow occupiers, residents and co-habiting tenants to better communicate with each other. 

2. In-house customer services for both commercial and residential buildings, such as student residential, BTR, coworking and coliving. Elements such as wellbeing facilities and concierge-style services, offering an enhanced experience for all types of end users. 


Angela Dapper, Principal, Grimshaw
The future of real estate is about people-based design. We are seeing the rise of more vibrant spaces creating communities where people come together. The boundaries between external and internal are becoming blurred as buildings become more permeable, drawing people into previously private spaces. The design of office, hotel and residential lobbies are merging to become similar in design as they strive to all become places for people to work, meet, mingle and exchange ideas.