From multi-modal to mixed-use: the six trends set to drive earnings growth in the business park sector
Prime business parks, as measured by the BNPPRE Business Parks Index, saw total returns of 3.5% in the first half of 2017. Looking ahead, total returns of 7.2% are expected for 2017, up from 4.4% in 2016.
This relatively strong performance, following an increase in investor appetite over the last seven years, paints a positive story for the future of business parks as an investable asset class. The sector’s scale, together with its relatively cheap occupier costs, higher yields and asset management and repositioning potential, offer investors a lot to work with, as shown recently by deals from global investors Frasers Centrepoint and TPG Real Estate.
However, in the aftermath of the UK’s vote to leave the European Union and considering the new, sombre era of income-dependent total returns in which investors operate, the onus is now on driving earnings growth from property. Or rather, from a pessimist’s perspective, maintaining said earnings in the face of coming headwinds.
One of the key considerations to maintaining business parks’ cash flow is ensuring they remain relevant to occupiers. Many investors have taken a binary, top-down view on this sector and written it off in favour of city-centre offices. We would dispute this view, but would not argue with the need to continue to innovate.
The key is to see past the urban vs suburban argument, and the density argument, and seek to focus and understand the fundamentals that make workplaces attractive to occupiers and their staff.
From the way that business parks use space to the way occupiers work in the digital age, we believe there are six main structural changes that present opportunities in the business park sector in the coming years:
Data centres will be increasingly seen on parks
Power reliability, energy cost, fibre optic provision and scale are the core factors driving data centre location decisions. This expanding source of demand needs space for both customer-facing applications – where low latency (proximity to users) is not vital – and financial services and machine-to-machine applications where paying a real estate cost premium is preferable to achieve low latency.
A blurring between office/research and development and light manufacturing space
These all fall into the B1 planning use class. However, the distinction between them has always been clear. This is something likely to change going forward, in particular with regards to those bits of industrial that have fallen into B1 use owing to them “being a use which can be carried out in any residential area without detriment to the amenity of that area…” We expect technology (particularly 3D printing) to grow its footprint on what have been traditionally office parks.
Amenity offer must continue to improve
Although many parks have made long strides in terms of their amenity offer, this has been from a low base. To remain competitive against urban areas, standing still simply will not work. For wholly-owned parks this should not be difficult, provided the amenity offer is viewed through a holistic lens. For others, a collaborative approach will be vital; ‘beggar-thy neighbour’ policies only serving to bring down the whole.
New investors looking at the sector consider transport options as a vital indicator of future occupational interest. Car-parking ratios are still fundamental, albeit this space has strong development potential in a driverless future; but the full multi-modal mix of car, bike and shuttle bus or (preferably) train will define prime business parks.
Park-wide technology applications
An area where shopping centres have made large strides, and where the latest generation of office buildings are going; the Edge in Amsterdam’s building app being the prime example. Pan-park apps supporting tenants across building, amenity and transport functions should be regarded as a near-term necessity.
The long march to mixed-use
Real estate markets across the globe are in flux, as technology, demographics and social change continue to impact markets, often at speeds the inflexible real estate sector struggles to adapt to. However, one thing we can be sure of is that rigidly planned, mono-use real estate is a thing of the past. Business parks are likely to have to develop a greater range of uses, and operate seamlessly outside of the traditional ‘working hours’ model, in order to remain relevant.