Against the background of an improving commercial property market, the performance in the region has lacked pace. But certain fundamental facts are influencing the market and will become more important throughout this year. These are:

• There is a general shortage of Grade A office space even though Highcross is going ahead with its major Lakeside project;
• The shortage of industrial space in a region which has shown strong growth in the past few years is becoming a real problem;
• At this time, developers appear reluctant to start on new schemes even though it is obvious that the shortage of prime industrial and office space presents an opportunity for them. This cautious mood was not helped by the poor figures for 2009 when only 13,006 sq.metres (140,000 sq.ft.) of offices were let in Southampton, one of the lowest figures on record. The latest industry reports point to a recovery in the UK and, therefore, potential for a region which it is generally agreed offers above average possibilities.

Ross Moyler of Vail Williams said: “There has been an improvement in occupier attitudes although this has not been translated into transactions. The second half of the year will be better because there is some hesitation ahead of the General Election. The positive factor is that fewer companies than expected have gone bust because the banks have supported them.”

From Savills comes a report that development activity in the UK in February expanded at the fastest rate since May 2007. The main reason for this is the growth of the economy. The encouraging feature is that the outlook remains positive for the short term future; the improvement has come from the private sector and is strongest in the industrial/ warehouse sector where it is driven by client demand.

A report from Cushman& Wakefield highlighted the strong demand for commercial property and the continued decline in investment yields. Once again this message, like the prospects for industrial property, has to be music to the ears on the south coast.

David Erwin of C&W commented: “The investment market remains firmly in favour of the vendor. While this is set to continue, we have also recently seen, perhaps, the first signs of more discretionary investing than we have seen for some months.”

Confirmation of the improvement in the investment market in the region came in a report from Lambert Smith Hampton (LSH). The consultancy reported a rise in investor and institutional interest as the UK emerges from the recession.

LSH’s Jerry Vigus said: “In the third quarter of 2009 the investment market saw the first real signs of improvement since August 2007. The market is still in the midst of its worst downturn since the late 1980s, but by the end of last year we witnessed a few key investment deals that indicated the worst may be over.”

Vigus added that the average yield on transactions has hardened in two years, “particularly on the south coast where it is seen as an attractive area to invest. It is too early to predict the end of the bear market, but these may be the initial steps towards the improvement in fortune that the market has been waiting for.” One reason for this is that rental values have held up well in the region which has the added bonus of a reputation among institutions and investors for resilience to economic change.

Among the trend setting deals was the sale of the BBC Television Centre in Southampton for £8.5 million, a yield of 6.25%, and the largest was the purchase of the five buildings occupied by the Air Traffic Services at Solent Business Park by the Israeli investor Igal Ahovis for £55 million.

Oddly enough, this optimistic view coincides with a more depressed assessment of the attitude of developers on the south coast. In a report from solicitors Adams & Remers, whose clients include investors, lenders and developers, the outlook for development remains gloomy as banks continue to seek to reduce their exposure to the market.

The firm’s David Platt said: “There are developers across the south east sitting on land banks that they wish to develop and bring to the market. Developers can, unfortunately, expect to continue to see a near complete lack of funding for quite some time yet.”

Platt did point to a number of niche areas where developers can obtain finance, such as health where the government or primary care trusts will usually fund part or all of the development. The other favourable area is affordable housing.

In a steady process of sale and lettings, SEGRO is filling up its Voyager Park, Portsmouth.

The latest company to take a unit is Stone Bridge Global which will use it for storage and distribution facilities for its overseas customers.

This means that SEGRO has let or sold 60% of Voyager Park’s first phase of 1,487 sq.metres (160,000 sq.ft.). It is also offering plots for design and build projects of up to 23,234 sq.metres (250,000 sq.ft.) in a park which close to Junction 12 of the M27.

SEGRO’s current incentive package is helping the letting process and the company’s Chris Davies said: “This is the second letting to complete in a matter of weeks and highlights the park’s prime position for industrial or distribution companies.” The other company to take a unit is Vitec Global, which specialises in anti-microbial chemicals and purification systems, which will bring together its staff from Southampton, the Isle of Wight and Guildford into one location.

At SEGRO’s other business park in Portsmouth, the Railway Triangle, a unit has been let to Safe Estate Services for a new regional depot. The two parks are part of SEGRO’s South Coast cluster which totals 102,230 sq.metres (1.1 million sq.ft.) in six estates.

In its recent annual results SEGRO reported a vacancy rate by rental value of 13.5% compared with 10.9% in June 2009, which reflects the 20% vacancy rate of Brixton Plc which it bought last year. SEGRO is confident, however, that this rate will decrease as it applies its own more aggressive marketing policies. Letting activity in the first six months of the acquisition supports this, as exampled by the 100,000 sq.ft. of lettings to seven new customers at Trafford Park, Manchester.

An exhibition at Portsmouth Cathedral poses the stark problem of Portsmouth being under seawater by 2100. Organised by the Royal Institute of British Architects (RIBA) and the Institution of Civil Engineers (ICE) the exhibition focuses on three choices; namely, let the sea take over and retreat inland, develop improved coastal defences, or expand the city into the sea using new building technology.

One developer that is steaming ahead with building plans is Highcross which now has planning permission for a £500 million scheme at its 100 acre Lakeside North Harbour site.

Construction on the first phase of the 92,900 sq.metres (1 million sq.ft.) project with a variety of offices, a car dealership and hotel/conference centre will start this year.

Highcross has already established the location as a highly successful place for companies. Russell Mogridge of Hughes Ellard said: “This is a strategic location and, with over 50 companies, is like a regional business centre with good parking and transport links. The success has been built on the aggressive marketing by Highcross”

As far as the office market on the south coast is concerned, Mogridge said: “Confidence is building up and serious enquiries are coming through. It is noticeable that the larger companies are taking space, while the smaller ones are less active.” The problem is a shortage of space in city centres and business parks.

Jason Webb of King Sturge is concerned about the impact of the offices in Southampton formerly occupied by Carnival, the cruise liner company, coming onto the market now that it has moved into new offices.

“The positive factor in the market is that some landlords are being proactive and refurbishing space. The quality and availability of quality space is crucial and we need development to start,” he added.

The government’s ill thought out imposition of rates on empty property is coming home to hinder the market on the south coast. While that was expected, the impact is already showing in a shortage of new space and large industrial units.

It comes at the wrong time, as illustrated by a survey by Jones Lang LaSalle, (JLL) which recorded a strong increase in occupier activity in the industrial and logistics market in the second half of 2009.

The report added that: “An unsteady economic recovery may limit the overall take up rate for large units and many occupiers will be able to absorb any potential growth in existing units which are currently not operating to full capacity.”

JLL’s Richard Evans said: “While improving take up figures in the second half of last year is positive for the sector, it is important to bear in mind that growth is based on low volumes.” He expects development activity to remain limited for another 12-18 months due to tight finances combined with concern about sustained growth in occupier demand.

Russell Mogridge of Hughes Ellard said: “The industrial market is picking up and there is a real shortage of space in the plus 1,858 sq.metres sector.” He quoted the example of a 6,039 sq.metres Royal London property at Hedge End where there was competition for it from two occupiers. As for large units, there are none available. “I now believe that developers will come back into the market to satisfy this demand,“ Mogridge added.

David Heda at London Clancy says that “2010 has got off to a much brighter start than anticipated.” Occupier activity in the industrial market has been quite encouraging and there are signs that the trade counter market is returning.

A number of occupiers are still seeking to purchase while prices look good value.

Lambert Smith Hampton has also expressed its concern about the lack of large industrial units on the south coast that could push companies out of Hampshire as they seek space. LSH pointed out that there was a good take up of industrial space in 2009 along the M27 corridor but this has left only five buildings currently available between Southampton and Portsmouth.

LSH’s Jerry Vigus said: “Companies will need to be thinking now if they are looking to make a move within the next 12-15 months, and developers need to be acting equally as quickly.”

Goadsby have let a number of units on behalf of a private landlord at Endeavour Park, Ringwood. The largest was a 1,508 sq.metres (16,237 sq.ft.) unit to Nevis Marketing and a smaller unit to Duraseal Print Finishes. Chris Wilson of Goadsby said: “Nevis Marketing previously occupied two units in Christchurch and were keen to consolidate into one property.”

Nik Cox of Hughes Ellard notes that an increase in enquiries for offices indicates the market is picking up quickly. “There are a lot of deals in the pipeline but there is a shortage of quality refurbished space.” One property that has been refurbished is Mapeley’s 3,624 sq.metres (39,000 sq.ft.) Queens Keep offices in Southampton which is letting for £134.50 a sq.metre (£12.50 a sq.ft.).

Bournemouth Airport is thriving as a business location with the latest letting a 5,049 sq.metres (54,350 sq.ft.) warehouse at Aviation Business Park to Shears Bros Transport. Ian Shears said: “The warehouse has been specifically designed for our warehouse and distribution operations. Now all the freight we handle is transferred totally protected from the elements in a safe and secure environment.” The relocation from a considerably smaller unit on the airport is part of a long term growth plan and Shears said “we can now start to roll out the next phase of our development by extending our full range of distribution and warehousing services to new clients.” Chris Wilson of Goadsby, the letting agent, said: “The quoted rent was £43 a sq.metre (£4 a sq.ft.) and it attracted interest from a number of occupiers.” Another deal involving Goadsby was two lettings at Capital House, Southampton for Arcadian Estates. An unnamed company has taken one floor with the option of another while Crescent Training Services has also leased the second floor, bringing the total to 1,022 sq.metres (11,000 sq.ft.). There are another 1,858 sq.metres (20,000 sq.ft.) available.

Legal & General’s popular Waterloo Industrial Estate, Hedge End, has pulled in three tenants who have taken 3,697 sq.metres (39,800 sq.ft.) between them. They are Stearn Electric, Bishop Walham Removals and DHL. Adrian Whitfield of Lambert Smith Hampton, the letting agent, said: “L&G needed to secure long term income so we advised a complete refurbishment of the units and this approach has been justly rewarded with immediate lettings.”

On the surface the commercial property market on south coast appears to be behind the curve in recovering from the recession.

Yet it is an area that eschews boom and bust and goes steadily on. Except this time it has a shortage of property which will prove a barrier. The story from the rest of the UK is that when demand improves, you need the buildings available to let. At that moment many companies are simply not prepared to wait and sign up for a pre let.

That is amply true of industrial property where decisions on taking space come quickly with new supply contracts. Yet the south coast is short of industrial property - and Grade A offices as well. Although funding for new development has been tight, it is easing and there is also hunger at the moment for investments, both offices and industrial. Those should be persuasive factors for cautious developers who worry about such things as a double dip recession or the impact of the general election.

Of course the government has been foolhardy with its empty rates law, which we hope will be rescinded, but developers will not grow their businesses unless they take a chance and build.