Commercial property boom years are a thing of the past

Published on Wednesday 1 April 2009 21:31

THERE will be no early return to the commercial property market boom years in Edinburgh as landlords are forced to "throw out the rulebook" in an attempt to attract tenants, one of the country's biggest estate agency chains has warned.

Unveiling a survey of the state of the market in the capital, Jones Lang LaSalle directors have revealed that even offers of extended rent free periods are failing to attract interest in office and industrial properties.

They warned that the credit crunch would continue to be felt in every area of the commercial property market. Its effects would include:

&#149 An end the "pass the parcel" quick sales and re-sales of properties

&#149 Increasing numbers of "distress sales"

&#149 The likelihood that more companies will go into receivership

&#149 downgrading cities like Dundee and Aberdeen to "secondary" status

JLL yesterday branded the property market a "paradox" as potential tenants stay away in droves despite office and industrial landlords extending generous rent free periods.

The lack of demand is also forcing retail landlords to pay hundreds of thousands in capital contributions for "fit outs" of offices and to agree to waive rents in exchange for a percentage of their tenants' turnover.

Ben Reed, office and industrial director for JLL, said: "Landlords are being creative the way they package up deals. Quoted rents in many instances are thrown out the window, you throw out the rule book at and look at the deal on the table. You work with the occupier."

JLL's report shows that the value of offices in Edinburgh fell by about 40 per cent last year, and retail property has fallen "at least" by the same amount.

In its Edinburgh City report, JLL also says that transaction volumes in 2008 in Scotland fell 66 per cent, more than in UK as a whole which fell 59 per cent.

Kenny Waitt, director of JLL's capital markets division, said the practice of investors trading property and banking millions on each transaction, sometimes only months after the property was acquired, has ceased.

He explained: "Now pass the parcel has stopped, a lot of these things can't be sold."

JLL said there had been examples of distress sales and it predicted empty offices that are not bringing in sufficient income to meet bank payments could fall into receivership. In February the developers behind former GPO building Waverley Gate went into administration.

Waitt also warned that there was little likelihood of a return to the pre-2008 property boom. He said: "The new pricing world we are in is not a pricing word that will change quickly."

He said there were some potential investors returning to the market, although those relying on bank finance had much lower gearing – at around 60 per cent rather than 80 or 90 per cent common before the downturn. Others were buying property without any bank investment.

Waitt revealed that what was once branded "prime" property has been downgraded to "secondary" in some instances.

He added: "These would-be international investors looking for prime retail would probably now discount Dundee, Aberdeen, Dunfermline, Ayr, all those sorts of towns."

Service with a smile entices a growing number of firms to stay put

DESPITE landlords of traditional offices offering big incentives, many potential tenants are staying put in serviced offices in an effort to keep overheads fixed.

Although serviced offices tend to be more expensive, flexible leases and additional facilities like video conferencing and switchboard operators are an increasingly attractive part of the package.

Regus Group, one of the UK's largest serviced office firms, last month revealed both profits and turnover were up.

It cited "fundamental change" in how businesses operate, as even FTSE 100 companies rely on temporary offices to keep costs down. As a results its share price has gone up almost a third to 73.5p.

Scottish business centre group Abbey Office Centres yesterday claimed that tenants are staying longer, particularly in Scotland. Edinburgh-based Abbey said its occupancy time was 10 per cent longer than average. A typical stay was 30 months, while the figure at the Edinburgh centre is 40 months.

Abbey has 13 centres across the UK including one in Swiss Re's "Gherkin" in London.

Julie Calder, Abbey managing director, said: "Leads and inquiries are up on last year and established clients are staying longer, either because they like where they are or because they are wary of taking on the responsibilities and commitment of a conventional office lease.

"The all-in charging structure of serviced offices helps them budget, which is a comfort in these difficult times."

Nevertheless, Ben Reed, office and industrial director for estate agency Jones Lang LaSalle, argued tenants willing to take on a longer, fixed lease would benefit from incentives such as rent-free periods or even "capital incentives" covering fit out or refurbishment costs.

"Rent free incentives for offices and industrial units have increased since the start of the year," said Reed.

He added: "It depends on the deal. The longer the lease, the more incentive they will get. If you can take 15 years on a lease you can get some very generous incentives."