Form an orderly queue

Thursday, June 28, 2007

The Herald

Major UK financial institutions are fighting to forward –fund Glasgow’s phenomenal success in the office market. There have been only two speculative city centre office fundings in the east decade – German fund iii- fonds provided the money for CALA’s Central Exchange in Waterloo Street and RBS subsidiary KUC Properties for Cerium in Douglas Street.

By contrast, in the first six months of this year, Glasgow has seen seven of these deals. Three are completed, four are in the investment market, and one is on a confidential basis as part of a larger portfolio.

The end value of the properties is more than £400m, with a mix of UK institutions such as Prudential, Morley, Standard Life and Scottish Widows, as well as other players such as Arlington, Redevco, German funds and Irish syndicates. Developers have to pay some of their profit in return for the security of getting their funding on board early. But this is a price most are prepared to pay since yields have come in so much that, even after de-risking their project, they are still making the profits they anticipated when they bought these sites.

As the chart below illustrated, Taylor Woodrow’s Cuprum under construction in Argyle Street, Ediston’s plans for the former STV studios at Cowcaddens, and Stockland Halladale’s proposed redevelopment of Shaftesbury House in Waterloo Stet have been able to wrap things up before their projects get under way. Underpinning all this fairly frantic activity is the strength of the city’s occupier market over the past two years and a substantial pipeline of known requirements for the next three.

One capital markets expert, Scott Campbell of Jones Lang LaSalle in Glasgow, acknowledges that funding tend to happen at the top of the market cycle, but he takes a positive outlook for the future. “In the 11 years I have been working on investment I have never known our office agency team to be able to confirm that for, three years ahead, we have a pipeline of genuine demand for good, sizeable requirements. “I have no doubt there is demand for these offices. There may be seven fundings, but there are not seven buildings going to complete next year. The developments are quite well spaced out, so there is no concern about a massive glut coming to the market. “Glasgow has almost re-rated itself as a city in the property terms. We have been trying for a long time to sell the story of regeneration, but it is only in the past three or four years that people are beginning to acknowledge that. “Office rents have escalated to a par with Edinburgh. Glasgow is no longer a city that has 400,000 sq ft take up per year – it is a city with 650,000 to 700,000 per year. There is good demand generated by the economy and there is a healthy supply pipeline which is not going to result in an oversupply, therefore the more opportunistic funders are saying, with prime office yields at 4.50%, we feel comfortable funding at 5.50%.

 “While some operators are happy to carry the speculative risk themselves to maximise return, most of the new office projects in Glasgow are taking the forward funding route. “It is understandable for people to take in the current low-yield environment, particularly if they have any concerns about the property market in general,” says, Campbell. “If they can go for a risk-averse approach for no less reward than they were hoping for when they bought these sites or planned these projects in the first place, you can see why it makes sense to do it.”

Campbell, who with DTZ has jointly completed the funding on Cuprum and is out seeking a funder for Buccleuch’s 71,000 sq ft Evolution, remains optimistic about the overall investment market. “People often get a bit down in property, forecasting only 8% or 9% returns over the next 12 months.

We have had a couple of years of phenomenal returns, but even the lower percentage I still better than any other asset class.

“Property will still be a very good performer this year. It is just not going to be the stellar performer of the past couple of years. Performance has now got to come from rental growth. Its performance over the past few years has been a little artificial, from yield compression and not occupier demand. We are going to get returns in the next 12 months that are sensible and justified. “It is going to be more difficult in the next two or three years to make money for people. Almost anybody has made money in property for the past 36 months. The clever people are going to make money in the next 36,” says Campbell. Not much doubt into which category he fits.