S&P business parks, particularly those in the South East, are well placed to take advantage of the demand for high income, low risk assets that has emerged as more and more investors are pushed out of the overpriced London market.

Despite the continuing view that activities are focusing on urban centres, a stable base of tenants still requires such locations. While low prices and considerable potential for refurbishment means the prime end of the sector has much to offer investors, according to the latest report from Strutt & Parker and IPD.
The S&P Business Parks Index said that almost 5.17 million square foot was needed in the South East alone, and that with speculative developments non-existent demand will fall on existing stock. 

"A unique kind of tenant wants to utilise business parks," explained Stephanie McMahon, Head of Research at Strutt & Parker, "and these have not gone away - hence there is still healthy demand for space in parks with good access, modern facilities, and adaptability - basically, prime stock.
"Income returns for business parks have been resilient over the last five and ten years, and we expect that to continue - and at a more stable rate than offices in general in the UK, which have a considerable proportion of top slice income set to expire."

Yields on the parks were up to 8.0 per cent by the middle of this year, compared to 4.6 per cent for Central London offices. Vacancy rates are some of the lowest in of any office segment or area, and only in the North of England are they higher than other office types.

Rental value growth, an indicator of tenant demand, continued to grow last year, by 0.4 per cent, and S&P parks were the only office type outside of London to see rental value growth.

Victoria Mejevitch, Head of IPD occupiers, explained the demand from tenants: "One of the most important requirements for large office occupiers is adaptability of space - they prize being able to change large, open plan offices to their own requirements.
"Business parks are well suited to provide this adaptability. Furthermore, though a number are in need of refurbishment, this provides an opportunity for investors to adapt these spaces to the needs of 21st century tenants, providing the next generation of working environments for occupiers."

S&P parks, as measured by the IPD/Strutt and Parker Business Parks Index, delivered returns of 5.5 per cent in 2011. The parks, which consist of largely prime property, covering 233 assets valued at £2.79bn across 59 locations in the UK, outperformed urban offices and standard business parks, which recorded 3.7 per cent and 4.3 per cent respectively. 

Andy Martin, senior partner at Strutt & Parker added: "The single ownership of the parks means investors can plan their park strategy accordingly. One of the main difficulties previously has been conflicting interests amongst investors who co-own - with some willing to invest while others merely run-out leases.

"The real value for S&P Business Parks comes from capturing longer term income streams from good covenant tenants and having the ability to manage a whole park as a single entity.  Such active management has, from our conversations with occupier clients, resulted in a coherent property experience."

Leases for S&P business parks have declined in length recently, with the average newly signed lease falling to just 6.1 years including breaks, shorter than that of the average UK office. While shorter leases add volatility, they mean a higher short term income stream, and importantly, show the adaptability of S&P business parks owners, and their willingness to compromise in the difficult current climate.

Greg Mansell, head of UK Research at IPD, added, "There is a common misconception that London offices are 'safe haven' investments, but this is not the case. They are volatile and many investors are starting to question their current price levels.

"Investors are again looking towards properties that offer secure income streams, and S&P, or prime, business parks, are well suited to meet this requirement. Their relatively low prices in turn offer high yields, and flexible floor plates offer scope for asset management.

"Much depends on how operators are willing to manage these parks, but nevertheless they have considerable potential."

The parks have even attracted attention from international investors willing to move out of London. Of particular note, last year Oxford Properties Group bought Green Park, Reading, and more recently IQ Farnborough was bought by Harbert Management, some of the largest acquisitions seen in the last five years.

Martin concluded, "In the future the best asset performance will come from those well positioned to benefit from growing occupier demand. We therefore anticipate an increasing focus on from investors on existing buildings with shorter income streams, particularly those on established business parks, with good parking ratios and the ability to successfully refurbish to grade A quality."

View the full Strutt & Parker/ IPD Business parks index in our research section.