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UK office parks a stand out 'pro-cyclical' investment opportunity

By Paul Norman - Tuesday, February 06, 2018 11:06

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The UK office park investment market presents one of the best pro-cyclical opportunities in the UK thanks to the pricing disparity created by the “relentless push” by investors towards urban regional office centres and London, according to a report from ACRE Capital Real Estate.

ACRE said the pricing discount for out of town office parks has arisen mainly to a "miss perception in the health of the sector and investors’ current sentiment towards this sub sector of the office market”.

The agent says occupational demand and take up and achievable pricing in the out of town office market indicates there is both rental and capital value appreciation to be captured which means the out of town office park market is “one of very few sectors in the UK which will offer investors with prospects of superior returns and attractive income returns”.

ACRE points to a number of key facts about out of town offices to back its findings.

It says that over the past 10 years, approximately 50%-60% of annual occupational take up in the Thames Valley and South East office markets has occurred on office parks.

In the same period approximately £16bn of office parks have been traded. In 2017, there was approximately £2.2bn traded. The largest investors within the sector have been UK institutions, Global Investment Managers and Sovereign Funds, the latter two being more dominant.

ACRE reports that the majority of office parks in the UK remain “below their peak 2001 rental levels unlike most urban centres” providing reassurance that there is realistic scope for sustained rental appreciation within this sector starting from an economic base.

It added that office parks offer investors an approximate 100-175 basis point yield advantage over city centre offices.

And it says that with income return set to be the primary driver of total returns over the next stage of the property cycle “it is realistic to assume that office parks can provide superior returns as they should realistically witness rental growth and yield compression from their current discounted levels”.

ACRE outlines a number of key attributes when selecting stock saying they should benefit from all or most of the following:

 

  • "Successful parks are those that can control and adapt their environment through a holistic master planned approach. This includes the scope to extend their parking provisions, enhance bus services to mainline transport links, creating pedestrianised zones, landscaping, the development or improvement of on-site amenities, to even the creation of a mixed use vibrant environment. Furthermore, those parks that have a progressive approach to building design with an emphasis on wellbeing and productivity will meet the aspirations of the very best talent."
  • A strong brand that is market dominant. “A strong brand leads to a strong occupier following,” ACRE writes. “Office park brands are created by having high quality, modern, flexible space offering both high levels of connectivity and amenity value. This is important to occupiers in both recruiting and retaining top talent.”
  • “Out of town parks which benefit from scale/critical mass have the ability to attract strong business clusters, on park “cross selling” through collaboration and the potential to become renowned as “locations of excellence. Parks of scale enable them to accommodate diversity in both building size, amenities and transport options. This in turn assists in creating a strong community feel amongst occupiers which assists in both attracting and retaining tenants.”
  • "Successful out of town office locations also need to be complimentary and relevant to their respective city centres. Many occupiers have car borne business functions and also large floor plate requirements. These in the majority cannot be satisfied in town/city centres due to both planning restrictions and there being constrained city cores."
  • "Access and proximity to multi-modal transport links is fundamental. Parks that benefit from close proximity to established transport links (motorway, rail, cross rail, bus and air) will maintain their competitive advantage. Those parks which benefit from both access and proximity to this level of infrastructure will maintain their competitive advantage as this is not easily replicated."
  • "Successful office parks are those that offer both amenity and an attractive working environment. Successful office parks are those that can distinguish themselves from the rest of the market through place making."
  • "Approximately 60% of the working population commute to work via car. The continued dominance of this medium of travel means that a key driver of office park/out of town success is in relation to their specific car parking provisions. New consented schemes only have car parking provision of 1:400 – 1:500 sq ft. Those parks with historic more generous provisions will continue to experience strong tenant demand."

ACRE points to a number of business parks as having these winning characteristic highlighting Blythe Valley Park (pictured), West Midlands, Stockley Park, Heathrow, Vanwall Business Park, Maidenhead. Farnborough Business Park, Farnborough

ACRE also provides a final observation that over the past five to 10 years there has been an increased “urban push from both developers and investors to renew and refresh under-utilised city centre opportunities”.

The shift towards urbanisation has in part been driven by occupier demand and the perception that corporates wish to attract and retain top millennial talent it says.

ACRE adds: “City centres have evolved and have created new, vibrant developments with a mix of uses together with a large residential emphasis. However, the majority of this residential development comprises apartment living and are now at a price point that is tipping the affordability scales.”

pnorman@costar.co.uk

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