Mixing it up in the Thames Valley

For an investor savvy enough to seek out opportunities in a competitive market, there is huge value to be gained, if you know where to look.

The area that is seeing the most growth at the moment in the Thames Valley is mixed-use development. In towns up and down the M4 corridor, as well as across to the M40 and bordering the M25, such schemes are taking hold. Having become experienced in this type of scheme over the last four years, we are bullish about the sector.

Certainly the Thames Valley hasn’t seen the same explosion from a residential perspective that central London has seen, but the Thames Valley’s residential property still presents good value. Values tend to start from £350/sq ft rising to £600/sq ft, perhaps £650/sq ft in the better areas such as desirable rural communities. We see a lot of value in the sector driven by commuters into London.

Getting to know mixed use

However, mixed use is quite an art. It is an interesting aspect of the market because there are no real specialists.

Our approach is to buy dilapidated industrial sites or offices that don’t meet today’s standards and transform them into residential concepts with retail thrown in. We are coming from the commercial developer perspective, which we do believe is easier than coming from a residential point of view. Despite the need to understand the local market, which can take some time, and the fact that developing mixed-use schemes requires a different skillset from commercial development, it is in many ways straightforward. Commercial development requires more technical knowledge, but once you understand the key prerequisites of a residential market, such as unit size, the floor area and the local market, it’s easier to grasp.

While a few of the larger housebuilders are approaching the mixed-use market, they don’t maximise the commercial aspect. They don’t think about how the place will work, how it will create places to work and spend leisure time. Our view is to maximise the commercial side with a view to the place actually working. We have dedicated a lot of effort to mastering all aspects of the residential market.

Jansons’ first mixed-use development was in 2011, when we converted a 1980s red-brick office building on Chiswick High Road. We created 22 flats, which involved adding floors at the top for penthouse apartments, and retail on the ground floor. On the opening weekend, we had 79 viewings and sold half.

This spurred us on to do more. We were so concerned about getting the specification right that we spent weekends bartering on kitchens in Chiswick, trying to understand what local buyers want. In the commercial market you often have just one occupier who at the end of the day isn’t too concerned about the finer details such as bathroom tiles. In residential there are many buyers who are very particular.

I believe there will be more mixed use in the Thames Valley in the next few years. While we’re not seeing any real jumps in residential value, the markets are already strong enough to attract more development. Once Crossrail opens, we could see further uplift. There is potential for development in towns with smaller stations, such as Taplow or Langley. These are strong areas for future growth, with lots of brownfield land to bring forward as mixed-use leisure, retail and residential schemes.

Indeed, the main challenge to mixed-use development is a lack of land. In the Thames Valley, no green belt is being released, except around certain towns such as Bracknell or Wokingham, where housebuilders are building swathes of ‘boxes’. So any brownfield site, if it has consent to be converted at all, will become residential because it’s worth so much more than industrial.

Industrial plight

This leads us into the sector that will see significant change over the next few years: industrial. We are edging towards a real lack of stock. The market is being decimated by mixed-use development that is taking brownfield industrial land.

SEGRO’s estate in Slough dominates the area’s industrial market and they do a good job at moving occupiers in and out, but rents are quite high now.

Where else can an occupier go? There is no new property being built and there’s very little existing stock around. Developers haven’t been building due to empty rates, bigger holding costs and so on. Speculative development is rare, it’s all about prelets.

While this pressured market may well lead to speculative development, there are two aspects developers need to consider - the occupier and the exit.

Starting with the occupier, demand is there. Feedback from the market is that there are many looking to expand that have waited until after the election - they’re feeling more confident about the economy but are taking their time to commit.

In terms of the exit, the investment market is extremely strong now. All the big funds are clamouring to get their hands on industrial stock and are keen to fund speculative development because they see a shortage coming through. So all the ingredients are there to take it forward, but land remains the issue.

One particular end of the industrial market that is thriving is the smaller units. There is lots of demand because occupiers are buying the freehold. Take Anglo Industrial Estate in Wokingham as an example. We acquired 24 small units of 2,500 sq ft each out of receivership a couple of years ago at £70/sq ft at a time when the market was slower. In the last year, all the units have sold at almost double the price. They could rise even further as no one is building. Inside the M25 at Park Royal, values are already pushing £200/sq ft for a small unit and that will be pushed into the Thames Valley.

Offices outperform homes

The final sector to consider in the Thames Valley is the office market, and we are certainly seeing action. I’ve worked in the Thames Valley market for 28 years, and I’ve seen three property cycles in that time. My view of the market is that each cycle peaks at the same value. From an investor point of view, you won’t see real growth, just the bottom and top of the same range. However, this time it’s different.

Until now, the highest rent achieved in the region has been £30/sq ft in top locations, but it never really hit this in Reading. This time around, we have quickly got to the top level and in some places have exceeded it. Reading is now more than £30/sq ft in the centre - it has broken the threshold. Windsor is back up in the early £30s per sq ft.

One of the main reasons this new peak has been achieved is because huge pressure has been put on the office market due to permitted development rights. Lots of secondary office stock has been taken out of towns across the Thames Valley, from larger towns such as Reading to smaller strong towns such as Giles Cross.

A good example is a mixed-use building we’re developing in Reading on Basingstoke Road. It’s an old industrial site and we’ve got consent for a district centre. With that we’re building an 18,000 sq ft Aldi and an 8,000 sq ft Greene King Pub as well as a Pure Gym. We initially bought the site to develop residential, but as we progressed through planning consultation with Reading council they preferred a district centre.

Windsor has been pretty well decimated by stock being taken out and here an interesting scenario is arising - one of our developments illustrates this perfectly. We had plans to develop an old police station in a lovely, bohemian area of the town into period apartments. But there has been so much office stock taken out and rents are up while yields have hardened, it now pays to let the property to an office tenant. This is a complete about turn. Offices are performing better than residential due to a lack of supply. There’s still a fair bit of yield compression and rental growth to come.

Against this backdrop of a lack of stock, many office occupiers have been talking about moving for a while, now they have the confidence. But where will they go?

Overall, the Thames Valley is a region that poses a lot of opportunity for those who know where to look. There is a greater call for mixed-use development, schemes that really work with a community than standalone residential blocks. On the other hand, any land that can be wrestled away from residential to become industrial or offices will surely perform well at the moment. With Crossrail on the way, the future certainly looks bright for the region and all it takes is a little effort to find those pockets of potential.

Andy Jansons is managing director of Jansons