Market ReviewFinancial Year April 2014 -15

Brian BottingBSc, FRICS, IRRV

Partner

We have land waiting to be built on when the market is strong enough, but rents would realistically need to go up to £13 per sq ft to make it worth any new development and that threshold is still some way off.

The office sector is healthier in Devon where Exeter remains king as far as rents are concerned. In Plymouth though an oversupply of industrial units and office space continues to curtail the market and this is compounded by firms relocating from Plymouth to Exeter. Our retail figures show that in Cornwall, Truro still commands the highest retail rent per square foot ITZA (In terms of Zone A) twice its nearest competitor which is St. Ives.

These figures demonstrate Truro’s all year round popularity whilst highlighting St. Ives’ dominance of the seasonal market for tourist shoppers followed closely by Padstow, Falmouth and Newquay.

The election may have a delaying influence on decision making and is likely to be very close between the two main parties but the travel of direction is good. The economy is back on track and I feel the next 12 months will see a continual churn of commercial property at similar levels to 2014 with the possibility for some limited growth in rental and capital values but predominantly restricted to the industrial and office sectors.”

“As we approach the end of this financial year (April 1st) we see a return in confidence across all sectors of the market and are looking forward to the coming fiscal year with optimism albeit cautious.

It’s clear that the high street banks are now actively lending and our professional team have noticed a marked increase in the number of valuations they are carrying out for bank clients.

Our Business Transfer Department which specialises in the Leisure and Hotel sector also report an increase in activity buoyed by better accounts thanks to a good summer season and in part by better house sales.

The Banks are more willing to lend, although still only on bricks and mortar and while we are nowhere near back to the heady days of 2006/7 people can borrow around 5% more than they could a year ago.

The industrial market is picking up but in Cornwall we are at a critical point. The last round of ERDF funding has now been spent, so developers have no choice but to sit on their hands and wait for an announcement on how the next tranche of £233m funds allocated for 2014-2020 will be allocated.

In Cornwall, we are expecting to see rents in the office sector edge back up to their natural level of £10 per sq ft now that the supply of available space has dwindled.

Introduction

M a r k e t R e v i e w 2 0 1 4 / 1 5 1

Contents

1 Introduction2 Industrial4 Retail

6 Office8 Business Transfer12 Investment

There are pockets where rental values are particularly strong like Newquay and Padstow and other industrial locations such as Falmouth, Penryn and St Austell are also steady markets.

There is a pressing need for more industrial development in Newquay, and in the Camborne, Pool, Redruth area.

Over the last year Miller Commercial has completed more than 70 industrial lettings. As an agency we conclude more lettings in the industrial sector than any other. This has been especially true over 2014 as the take up of industrial premises increased across Cornwall.

We are in a situation where the county’s existing stock of industrial premises are gradually being taken up to the point where supply in certain locations is very limited. The greatest demand comes from those looking for units of up to 2,000 sq ft and there was evidence of this in 2014 when space at the part European funded Quintrell Downs development just outside Newquay was sold or let prior to the completion of the development.

Mike NightingaleBSc (Hons), Dip Arb, MRICS, ACI Arb

Partner

Locations along the A30 corridor remain king for rental potential with Hayle, Camborne, Pool, Redruth, Bodmin and Launceston performing well.

2 M a r k e t R e v i e w 2 0 1 4 / 1 5 I n d u s t r i a l 3

Cornwall Business Park at Scorrier is now being marketed and plots are available for sale or development for either owner/occupation or rental. We have seen early indications that this development will be a success.

For more than 14 years Cornwall has benefitted from European funding for Commercial development. First the Objective One Programme which started in 2000 and more recently Convergence. The last speculative industrial developments built under Convergence were the aforementioned Quintrell Downs near Newquay and Treleigh Park near Redruth which were completed towards the end of last year. Phase II at Walker Business Park on the outskirts of Truro is underway but aside from this there is little other industrial development in the pipeline. Whilst a further tranche of European funding has been agreed to assist with development between 2015 to 2020 there has been no announcement of where this funding will be targeted. Without this funding speculative

Industrial

Industrial Headline Rent £psf

A30 Corridor

Plymouth

St Auste

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ro

Falm

outh

and Penryn

Newquay

and Padstow

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1500 sq ft 5000 sq ft 10 000+ sq ft

development is largely not viable and there is therefore likely to be a two year time lag between the latest industrial developments and the next. This situation is likely to give rise to a gradual decrease of available stock which could put pressure on rents to the extent that we might see some growth. Much is however dependent upon how buoyant the economy remains.

tourism and demonstrates the very positive boost that holiday makers provide to the retail sector in these towns. It’s no surprise that the county’s capital city and major shopping hub, Truro, commands the highest retail rents. With prime pitches averaging £110-120 per square foot (ITZA) they are almost double the price of the next most popular towns of Falmouth, St Ives and Newquay at £50-60, £60-70 and £50-60 per sq ft respectively. It seems likely that rental values will continue to be much stronger in Truro than elsewhere in the County, particularly in Lemon Quay, where we’ve seen a reshuffle of some big name tenants who have taken space elsewhere in the city in order to make way for Primark. With Marks and Spencer already at this end of the city, Lemon Quay is likely to be cemented as the prime retail pitch in the county for some time to come.

2014 has seen a good level of activity in the Retail Sector with a reduction in the number of vacant units across many of the high streets. There has been some stabilisation of rents in primary and secondary trading locations albeit that lettings are often short term and lease provisions likely to favour tenants. This makes these trading positions more accessible to the wider market and we continue to see discount stores, charity shops, bookmakers, phone accessory retailers, cafes and latterly, e-cig suppliers, taking retail positions which they would not historically have been able to afford.

It’s impossible to provide one general overview of the retail sector in Cornwall. The county is unique in that each town has its own very different identity and demographic. The fact that some coastal towns have twice the retail rental value of many inland towns (excluding Truro) is predominantly down to

Rob Redgrave

Head of Commercial

4 M a r k e t R e v i e w 2 0 1 4 / 1 5 R e t a i l 5

RetailThe march of the multinationals continued into the South West throughout last year with companies such as Costa, Starbucks, Pasty Presto, Wetherspoons and Zizi all seeking out new locations in Devon and Cornwall. This year we saw both Frankie and Bennys and Prezzo open in the new Ark building in Newquay. We are now talking to other nationals to see if we can tempt them into the one remaining unit here.

Lounge Bar set up in Truro at the end of 2013 and are now finalising plans to open another Lounge bar and restaurant in Falmouth. JD. Wetherspoons will be opening in Helston this year and the pub chain has applied for planning permission to open its first hotel in Cornwall in Camborne. Meanwhile the Rick Stein empire continues to spread across the county with a new restaurant in Porthleven and another about to open in Newquay.

There seems to be a pattern developing where much of the demand for space in our towns and city from national/international businesses comes from coffee houses, bars and restaurants. There is less interest from new national retailers and the existing ones (Dorothy Perkins for example) are either moving to better value units or moving out altogether. It has long been expected that the larger retailers are likely to do what Next has done at Kingsley Village and open up in out of town retail warehouses where accommodation is much better value.

Out of town retail is a very topical issue at the moment. Coytes Farm on the outskirts of St Austell did not get approval and similar schemes at Truro Football ground and Langarth on the edges of Truro are presently being put forward by developers for consideration. One of the main factors in deciding whether or not a scheme is likely to be given planning permission is the impact it would have on the existing retail provision. There are other developers (Stanhope and Schroders) who hold strategic positions in the city centre and they would argue that out of town retail development would impact upon the viability of their schemes.

At the time of writing the Waitrose development on the east side of Truro is gathering pace and Cornwall Council has decided to back two other schemes on the western outskirts of the City which include housing developments, two supermarkets and a primary school. These schemes were preferred over others which involved multiple nonfood retail warehouses, one of which also incorporated the Stadium for Cornwall, and so the desire to reduce the retail impact on the City Centre seems to have been a significant factor in the decision. Maybe this provides an indication of the way in which the Council wants to see retail developed around Truro, with the City centre being the main focus. Interesting times ahead which will shape the County for years to come.

Zone A Headline Rent £psf

112.0

64.0

31.5 29.6 29.2 28.023.0

56.052.0

30.0 29.4 28.525.0

21.6

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St Ives

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Newquay

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Camborne

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Helston

Redruth

Hayle

Liskeard

Andrew RansonMRICS

Head of Valuation Services

Locations where there have been noteworthy levels of activity include Truro’s Newham Rd where Charles French Solicitors and Worldwide Financial have recently taken space, lured by more modern office space with car parking; Threemilestone on the outskirts of Truro, where a substantial over supply of accommodation - following the exodus of Cornwall Council and some high profile casualties of the recession - has now flipped following steady demand over the past 18 months to a situation where there is a healthy supply and demand balance. We have also seen good take-up of offices at Barncoose Gateway (Pool) and Tolvaddon Business Park (Pool), which are now nearing full occupancy – albeit after lengthy marketing campaigns.

This time last year we reported that there had been a significant increase in demand for freehold and leasehold offices during the latter part of 2013. I am pleased to say that this pattern has continued throughout 2014 to the extent that the stock of vacant offices is now at its lowest level for many years. In the years leading up to 2014 the oversupply in the market had very much favoured tenants who were able to negotiate very favourable deals with low rents, rolling break options and rent free periods of in excess of one year not being unusual. As vacant stock dries up this situation is now starting to change and whilst deals are generally still very favourable to tenants, Landlords can be a little more demanding than they have been in recent years.

6 M a r k e t R e v i e w 2 0 1 4 / 1 5 O f f i c e 7

As we stated above, rent levels remain at historically low levels with the majority of the above transactions being agreed at £8 to £10 per sq ft. This offers good value to tenants who are also generally able to negotiate regular break options which help to mitigate long term liabilities in the event that new business ventures do not work out.

The roll out of Superfast Broadband across Cornwall has not had the anticipated effect of raising rental or freehold prices in premises with the higher broadband capacity. Nor have we seen it tempt large businesses and organisations to relocate to the county. We are finding that size and location are still the determining factors for businesses looking for office space.

The introduction of permitted development rights in May 2013 - which allows the change of use of buildings from offices to residential subject to a prior approval process by the local planning authority - has been taken up by some property owners. This has particularly been the case on properties where tenancies on high rents (set in 2007/8)

Office

have come to an end leaving the landlord to either accept a significant drop in rental income which is reflective of current market conditions or to explore the possibility for conversion to residential. We have seen several buildings in Truro converted in this manner but it is fair to say that, whilst the principle of conversion is permitted, there are often complications. For instance the new owners of Lysnoweth House on Infirmary Hill, formerly occupied by the HMRC, intend to convert to residential but are coming across opposition from those who wish to see what are considered to be architecturally important buildings converted in a manner that is sympathetic to the original external features of the property. I am sure a residential conversion will proceed but these things are not always as simple as they first appear!

In conclusion, we anticipate a continued churn of office property throughout 2015 with an outside chance of rental growth. Larger office buildings that become vacant and are situated centrally within towns are likely to prove attractive for conversion to residential.

Rent levels remain at historically low levels but with the recent increase in demand and gradual depletion of stock there is talk of a potential for growth in rents in 2015. Agents are however unlikely to be too bullish in this regard as this sector is still one that could be considered fragile.

Graham TimminsBA(Hons)

Head of Hotel, Leisure & Business Transfer

2014 has seen an increase in the number of first time buyers entering the hospitality and leisure sector in the South West. Transaction levels are likely to have been buoyed by house price growth generally throughout the country, but particularly in the south east, which enables purchasers to use equity from residential property to put down the sizeable deposits that are typically required to purchase leisure property.

The Banks are, on the whole, willing to lend but they will generally look for previous experience within the leisure sector and expect the profits of a business to comfortably service the loan - often at a hypothetically enhanced level of interest to account for the risk that rates are likely to go up at some point during the course of the loan. This is good responsible lending and where businesses are performing well, or have the potential to perform well, there is money available.

Vendor’s expectations of value remains key to a liquid leisure market and where value is not supported by the trading potential of the business in question it is generally going to be more difficult to find a purchaser. This has been a dominant feature of the leisure sector over the past six years or so with sales often being dependent on interest from purchasers who do not need to borrow

8 M a r k e t R e v i e w 2 0 1 4 / 1 5 B u s i n e s s Tr a n s f e r 9

BusinessTransfer

as much money or on vendors who are in situations where they have to sell and so are willing to reduce asking prices to more reasonable levels. We do, however, now seem to be getting better quality instructions coming through at more realistic asking prices. We are noticing more confidence returning to the market and buyers seem to be making quicker decisions. Certainly during the

second half of 2014 the time taken in terms of viewing a business to then moving forward to an offer has been compressed whereas previously deals or discussions were going on for far too long resulting in a loss of momentum.

The major banks are telling us that they are keen to lend, which, whilst it sounds like an obvious mantra, is actually being followed through. Finance continues to be available from an ever-widening range of sources. 2014 saw the rise of ‘challenger banks’ luring unhappy customers away from the bigger names with more favourable lending criteria. This again, has increased the ability of buyers to invest in a new lifestyle business.

Any adverse publicity Cornwall suffered as a result of last year’s storms has had little or no effect on the county in terms of desirability. Indeed our clients tell us visitor numbers last summer were up on previous years and advanced bookings on 2015 are more than healthy.

Potential buyer’s confidence in Cornwall as a location for their business was buoyed by Visit Cornwall’s marketing campaigns and by positive media headlines during 2014 which kept on coming.

The Tall Ships event at Falmouth attracted a quarter of a million visitors meanwhile the town’s university was named in the top 50

universities in the country. St Ives was voted the ‘most ideal’ place to live, according to research conducted by Rightmove and Cornwall featured in the top ten googled holiday destinations worldwide.

Typically buyers continue to look for a lifestyle business in the South West which allows them to either trade all year in a place they want to live or have the opportunity to close in the off season.

The most popular types of business remain those which are easy to take over and require low levels of skill for new entrants into the market such as cafes, guest houses and even holiday parks.

10 M a r k e t R e v i e w 2 0 1 4 / 1 5 B u s i n e s s Tr a n s f e r 11

Leisure

Good weather last summer helped boost a stronger market in the Caravan, and Touring Park sector. The British Homes & Holiday Parks Association (BH & HPA) reported improved trading in Devon and Cornwall over the whole of 2014.

It is our experience that the majority of demand continues to come from those seeking smaller more affordable sites with good owner’s accommodation and a price tag of up to £750,000, whilst the larger more commercially operated sites are less sought after. Having said this, the last two leisure properties we sold at Miller Commercial involved properties that were on the market at £995,000 and £1.25m which shows that there is also demand for the more expensive businesses as long as the profit and loss accounts will support the purchase in the event that a bank loan is required.

Hotels and Guest Houses

Some of the market reviews by the larger national firms suggest that 2014 was a bumper year for hotel transactions. There have indeed been notable hotel sales in the County such as the Jamaica Inn and The Cornwall but the majority of transactions have occurred in the smaller, more affordable Guest House market. As ever location is king and it is towns like St Ives, Falmouth and Padstow where those with the largest cash deposits are prepared to pay premium prices.

The biggest threat to the guest house and small hotel market in Devon and Cornwall is the continuing expansion of the likes of Premier Inn, Travelodge and more recently Wetherspoons. The latter has recently expressed an intention to position itself in the hotel market with rooms proposed above its pub in Camborne and Premier Inn are potentially looking to develop new units in Penzance, Falmouth and Truro. We also note that a 70 bed hotel is proposed at the new Cornwall Services on the A30 just west of Bodmin. These continued expansions can only put pressure on existing hotel/guest house operators and the value of their property assets.

Licensed Premises

Nationally agents generally agree that the market has improved and that demand has increased for well-located premises with strong trading figures. We would agree the same is true for the local market albeit that the well-located premises with strong trading figures tend not to come to the market so often and it is the less well located pubs with poorer trade that make up the majority of the market place! The market for these ‘second tier’ businesses has been quite active over the course of last year with a number of freehold sales completing typically at below

the £300,000 level. These pubs tend to have quite poor accounts with values being more reflective of bricks and mortar than of the property as a going concern.

The leasehold market is still quite subdued but now better value than it has been for a number of years. Pubs on sustainable rents that are free of tie will understandably produce the highest premiums whilst PubCo opportunities are often approached with more caution due to the tie on beverages and rents that are sometimes out of kilter with the trading potential of a particular property.

PubCo reform is a topical issue with a Bill currently going through Parliament that seeks to regulate dealings between PubCo’s and their tenants such that leases will have to be offered on a market rent only basis free of tie. This Bill is yet to be enshrined in law but could potentially have a significant impact upon the leasehold market.

Nightclubs have the potential to be hugely profitable businesses but it only seems to be when they are struggling that they come to the market and invariably values plummet as a result. We sold Salt Nightclub in Newquay last year off a guide price of £230,000. The property extends to 4,500 sq ft and had once enjoyed a turnover of £850,000 but as a closed unit the price achieved was a great deal lower than one might expect.

Peter HeatherFRICS

Partner

and office sectors. European grant aid has continued to facilitate and assist specific projects, but speculative development in Cornwall remains thin on the ground.

Retail in the South West is also showing some strength. When the economy is doing well there are more tenants seeking space for their shops, (offices and warehouses). Rents rise and capital values improve. The financial crisis significantly reduced the value of buildings and these capital values are only now starting to recover. This bodes well for the forthcoming year, but as rents stabilise so will the market.

This renewed activity in occupier demand, on the back of sustained economic growth and an increase in confidence generally has fed through into the investment market and properties that are brought to the market are generally greeted with a good level of interest from prospective investors.

We act on behalf of clients with international and national portfolios, although most investors in the south west tend to be UK based, if not regional. Some seasoned investors are very sector specific, and we have noted a focus on industrial, retail warehouse and student accommodation - in particular with reference to the expansion of the Exeter and Falmouth University campus.

According to a recent edition of the Sunday Telegraph, commercial property has boomed as Britain’s economy moves into recovery, noting that some £4 billion has flowed into Funds that invest in commercial property, and in 2014 alone, commercial property made gains of some 19%, the highest annual return since 1988. Many experts are optimistic about the forthcoming year, tipping total returns of 10% or more.

This UK wide reality of improved confidence in the service, manufacture and construction sectors which marked the start of 2014, has also had a direct effect on the South West, and in particular, Cornwall and Devon, which has resulted in an increase in take up of vacant space particularly in the industrial

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Investment

The market for well let, multi tenanted industrial estates continues to be good and we are aware of several instances last year where purchase prices reflecting net yields of 9-10% were paid for such property. Location, quality of tenant and lease terms are of course the important considerations and yields will vary accordingly. It follows that it is important not to generalise too much when commentating on the market and to treat each property on its own merits.

The market for office investments paints a mixed picture with the yield spread being generally wider than for industrial.

Two single let office investments sold toward the end of last year in Falmouth for £246k and £122k reflecting net yields of 9% and 9.8% respectively, whilst a large multi let office investment that we were involved with on the outskirts of Camborne sold for in excess of £1.5m reflecting a yield of 10.9% - but potentially 14.6% if fully occupied. Again, the devil is in the detail and with larger office property investors will be considering what risk there is of ending up with vacant space and the potentially prohibitive costs that can be involved with holding empty commercial property.

Retail investments produce even wider ranging yields with those in prime positions let to blue chip covenants continuing to achieve the best prices (5% to 7.5% yield), whereas those investments where there is more uncertainty due to strength of covenant, length of lease term remaining, quality of town, position, or a situation where a unit is considered to be over-rented - will inevitably have the additional risk factored into price with 8% to 11% yields or worse not being uncommon.

There is a buoyant market for more affordable investments (sub £250,000), particularly amongst local buyers who are perhaps looking for a better return than they will be getting from residential or other investments. We recently experienced considerable interest in a Truro property let to Oxfam with ten years unexpired where the highest bidder purchased at a price that reflected a net yield of sub 7%. Better value investments with net yields of nearer 10% have also been quite common place over the past year but the purchaser will generally be taking a greater risk in terms of location, tenant or lease terms or often all three.

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TRURO: Mansion House, Princess Street, Truro, Cornwall TR1 2RFEXETER: Queensgate House, 48 Queen Street, Exeter, Devon EX4 3SR

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