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A review of the commercial property market
The predictions for 2003 for the property market were dire, especially for the south of England, a slowing down in the housing market, a hike in interest rates and a falling off of occupier demand.
But what did happen during the past year? Well the office letting market did not improve in Southampton but it did in Winchester and in out of town locations. There for the first time rents equalled those in the city centres. At Solent Business Park, the 48,000 sq. ft. Forum 3 was reportedly let to TML at a rent of �19 psf. In Winchester, a best rent of �17 psf was achieved for the 7000 sq. ft. Fiennes House, let to Rathbone Investment Management. However in Southampton there were no lettings of new buildings and in any case there is currently only one available, of 14,000 sq.ft..
Demand for freeholds everywhere stayed strong, with a great deal of competition for just about everything, particularly as every town in the area lost commercial space to residential conversions. This also put pressure on green and brownfield sites where residential values far exceed any commercial use. Incredibly enough we have seen offers of up to �3 million per acre.
Investment yields, already far ahead of anything seen in recent decades, were anticipated to soften. What actually happened was that they hardened even further, with good covenants on 10 year leases commanding sub 6% and a new retail warehouse investment in Honiton going for sub 6.75%. Buyers went crazy at auctions, sometimes apparently falling in to a feeding frenzy, though for the first time in December there were a number of no sales at one major event.
So, with the first small increase in interest rates, are we seeing the beginning of a sea change? The answer is probably not, or certainly not a negative one. Our view is that there is more optimism out there right now than there was at the beginning of 2003. The shops have just had a booming sales time and it does not look as though Christmas was a total disaster for them.
The housing market won�t collapse. At most we might see something between -5% and +5% in prices in the South during the next 12 months, neither of which should cause undue alarm. In fact this should provide a calming effect on the financial nerves that guide the country�s economy.
What we hope we will see is more tenant demand, large and small, for offices and for industrial units. The market has for too long been dominated by indecision and the �it has to be freehold to be of interest� mentality. This might actually come about, as interest rates edge up a little during the year. Again no cause for panic, and manufacturers and service providers realise that short flexible and convenient leases are now available to them both inside and outside of the town centres.
Overall we see 2004 as a year to look forward to; a year in which limited growth will be supplemented by a strengthening of confidence; a year that will be constructive for everyone in the property market.
For further information please contact Jeremy Braybrooke, Palmer Fry on tel. 023 8022 7337 or email: [email protected]
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