Study Notes on Office Property Market Sector Valuation

OFFICE PROPERTY MARKET SECTOR VALUATION R5014C17

INTRODUCTION

  • Real estate is typically organized by property types:

    • Residential: Includes single-family houses and multifamily units.

    • Commercial Property/Commercial Real Estate (CRE): Explores properties used for business purposes and includes a range of sectors.

HOW DO WE DEFINE CRE?

  • Commercial Real Estate (CRE) is defined as property intended for business purposes and is categorized as non-housing.

    • Categories include:

    • Offices

    • Business Parks and Industrials

    • Retail

    • Hotels

    • Alternatives (e.g., woodlands, self-storage, student accommodation)

    • Housing when non-owner occupied for investment.

DEMAND AND SUPPLY SIDE

  • Urban centers house the largest numbers of the knowledge-based economy.

  • They serve as administrative headquarters for both private and public sectors.

  • Key Issues:

    • Limited supply of quality office spaces in various locations.

    • Need for conversions of existing properties to meet changing demands.

FACTORS AFFECTING THE OFFICE PROPERTY MARKET

  1. Location of Premises: Proximity to central business districts (CBD), suburban dynamics.

  2. Quality of Offices: Environmental ratings that reflect sustainability and infrastructure quality.

  3. Infrastructure and Social Amenities: Essential qualities that support functionality and desirability of office properties.

  4. Economic Activity: Influence from uneven economic performance across different sectors.

  5. Political Factors: Events such as Brexit, regional conflicts (e.g., in the Red Sea).

  6. Population and Demographics: Changing population trends affect office space utilization.

UK OFFICE MARKET

  • Current Trends:

    • Increased patterns of remote working are making physical office spaces less critical.

    • Although the trend of remote working is not new, it has accelerated due to COVID.

    • Lower office occupancy allows for alternative uses of spaces, e.g., event areas, breakout rooms.

    • The demand for office spaces is anticipated not to return to pre-pandemic levels in 2021, as there is a strong correlation between the sector and employment figures.

    • Currently, about 110 million square feet of office space is vacant in the UK, representing a 75% increase from the start of the pandemic and the highest number in nine years.

    • Projections indicate that the figure could exceed 140 million square feet by 2025 due to new building completions in a context of weak demand.

OFFICE LEASING

  • Key Statistics:

    • Office vacancy rate in the UK has risen to 7.9%, marking a 9-year high.

    • Demand losses were evident in 2023.

    • Preference for prime-grade spaces over older Grade B or C properties.

    • Major city centers outperform, with areas like the London West End and Birmingham's Jewellery Quarter showing resilience.

    • The technology sector's leasing activity has seen a reduction.

    • The Brain Belt in the South East, particularly Oxford and Cambridge, is performing well based on leasing data.

OFFICE RENT

  • Despite falling demand in general, average asking rents have remained relatively stable.

  • Record rents are noted in major markets due to high occupier demand for limited high-quality, sustainable spaces:

    • Average of £40/SF across the ‘Big Six’ regional cities, nearing £60/SF in Cambridge.

    • South East areas, including Cambridge, Oxford, and Milton Keynes, have performed well since the pandemic.

    • Larger regional cities such as Bristol, Edinburgh, and Newcastle have also exhibited strong rental performance.

    • London is predicted to underperform against the national average in the coming years due to a steeper rise in vacancy rates.

OFFICE SALES

  • The UK office investment market is experiencing historically low levels of activity:

    • Annual office investment has reached just £8.5 billion, a 14-year low.

    • This figure is less than half of the 10-year annual average of £23.7 billion.

    • Investor sentiment is weak, influenced by higher borrowing costs and rising vacancy rates.

    • The environment of low prices is expected to attract increasing investor interest in regional cities as borrowing costs decrease.

    • Multi-let buildings are identified as likely targets for investment.

GRADING OR CLASS OF OFFICES

  • Offices are classified into grades based on quality:

    • Grade A/Class A: High quality, newly built, located in prime areas with high infrastructural support.

    • Grade B/Class B: Slightly older, well-maintained buildings in prime locations but less modern.

    • Grade C/Class C: Older, functionally obsolete buildings with lower desirability.

    • Additionally, classification can also be determined by:

    • Occupation: Single Tenant versus Multi-Tenanted properties.

MARKET STATISTICS Q4 2023

  • Office Market Performance Data (indicative figures):

    • Birmingham:

    • Inventory: 18,625,000 SF; Availability: 1,044,075 SF; Vacancy Rate: 5.60%; Prime Rent: £41.00/SF.

    • Bristol:

    • Inventory: 14,100,000 SF; Availability: 778,317 SF; Vacancy Rate: 5.50%; Prime Rent: £42.50/SF.

    • Manchester:

    • Inventory: 22,500,000 SF; Availability: 2,777,654 SF; Vacancy Rate: 12.30%; Prime Rent: £40.00/SF.

    • Total UK Statistics cover 361,201,678 SF of overall inventory, with a total vacancy rate of 4,507,555 SF.

PLAYERS IN THE OFFICE PROPERTY MARKET

  • Key players include:

    1. Institutional Investors: Such as insurance firms and pension funds.

    2. Property Companies: Both private and public, like British Lands, Segro, Intu, etc.

    3. Private Investors.

    4. Corporations: Engaged in property leasing and acquisition.

TOP OWNERS

  • Top Owner Statistics (Example figures):

    • Brookfield Corporation: 1,551,571 m² owned across 56 properties.

    • Legal & General: 1,033,722 m² across 220 properties.

    • Qatar Investment Authority: 1,029,754 m² over 23 properties.

TOP BUYERS

  • Examples from the last 12 months:

    • UBS AG: Sales volume £400,499,999.

    • City Developments Limited: Sales volume £347,906,064.

    • Pension Insurance Corporation: Sales volume £269,975,000.

MEASURING PERFORMANCE IN THE OFFICE PROPERTY MARKET SECTOR

  • Key metrics include:

    • Built Stock: Total buildings ready for use.

    • Availability: Measure of how much space is currently available.

    • Vacancy Rate: Percentage of vacant properties.

    • Rent Expectations: Future trends in rental prices.

    • Inducements: Factors encouraging leasing decisions, such as rent-free periods.

    • Investment Enquiries: Level of interest from investors.

    • Capital Value Expectation: Anticipated changes in property values.

PRESENT AND FUTURE TRENDS

  • Trends observed include:

    • Flexibility in working arrangements emphasizing adaptable office designs.

    • The impact of companies like WeWork on office space utilization.

FURTHER READING

  1. Understanding towns in England and Wales - Spatial analysis focusing on population and employment growth (ONS Dec 2020).

  2. Impact of Travel to Work Areas: How surrounding areas influence the office sector in rural and conurbation contexts.

Thank you.