We need offices, but who can afford them?

Oct 10 2007 by Graeme King, The Journal

THE construction view of life on the property sector is interesting in that research suggests the industry reckons the continuous growth seen in the past three years cannot go on forever. The reason for an expected downturn is likely difficulty in funding future projects.

There is little doubt demand for offices has continued to be well ahead of projects coming through, with most big UK centres talking of take-up exceeding supply.

This has been supported by investment activity as borne out by national statistics showing institutional investment in all asset classes relatively strong to the end of August.

So, matching institutional demand for investments, and demand for office space with little supply, it is not surprising the sector reports increasing business this year, with offices under construction up more than 40% compared with the same time last year.

The shortage of supply has driven up rents, with investors enjoying strong returns based on increasing capital values. It is all looking pretty good.

But there is some caution in the market place with the possibility of a drop in returns as we go into 2008.

This shift in sentiment is attributed to financial market turbulence, ironic bearing in mind that it has been the financial sector and professional services which have had much to do with the buoyant demand for space in recent years. Debt-financed investors will feel the effect of rising costs of finance and a possible slowdown in office lettings. Weaker demand for investments could see an upward adjustment in yields, reducing anticipated values.

While there is uncertainty in the sector, some office schemes could be held back, despite apparent demand and shortage of supply.

Newcastle is no different from other major UK cities. It continues to see rental growth in the office sector with £22 per sq ft established and it is faced with demand far exceeding supply.

As it is, only one office building will be completed this year and that provides just 14,000sqft. In all, fewer than 100,000sqft are available in central Newcastle’s office core and much of the space under construction for completion next year is pre-let.

Newcastle has considerable strengths enabling it to come through any short-term downturn in demand. It has many locational advantages which give the market resilience.

David Furniss is head of Atisreal’s Newcastle office.