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Developing and regenerating for the future; The hotel sector has proved something of a white knight for Birmingham's secondary office market, mopping up outdated accommodation and bringing it back into use. But as the supply of suitable accommodation runs dry, Martin Guest, managing director of CB Richard Ellis in Birmingham, asks where the next lifeline for the city's other unloved buildings and fringe locations will come from.

Byline: Martin Guest

Birmingham has a two-tier office market. At the top end, Grade A rents are now around pounds 28.50 per sq ft - some way short of the pounds 33 per sq ft headline reached in 2007, but nevertheless on a stable footing.

In contrast, rents on secondary space have tumbled even lower. In some places they are as low as the early teens, compared to pounds 20 per sq ft at the peak of the market.

What's more, Grade A space is slowly depleting, so the outlook for rents is that they will soon begin to accelerate.

But for non-prime accommodation, even the medium-long term prospects for recovery look bleak. The sector urgently needs a shot-inthe-arm to aid its recovery.

Fortunately, while the office sector has been subdued, the hotel market is booming and has proved to be something of a white knight for Birmingham's unloved office space. It was Premier Inn's acquisition of 3-6 Waterloo Street from Opus Land which kick-started the change of use from offices to hotels in this city. During the height of the property boom it would have been unthinkable that a prime office development site such as this would have fallen into the hands of a budget hotel chain.

Whitbread (owners of the Premier Inn brand), however, has plans to expand its estate by more than six million sq ft over the next three years, and is targeting empty offices. The recession has given the brand the opportunity to get its hands on prime locations at a reasonable price, salvaging out-of-fashion office space from the scrap heap.

Where Whitbread pioneered, others followed: Bruntwood's acquisition of part of the Snow Hill Plaza site earlier this year included the outdated Kennedy Tower. Hotel management company Sanguine Hospitality is to turn this into a 224-bed Holiday Inn Express.

Sanguine is also behind the proposed Hampton by Hilton hotel, which will see Broad Street's rundown 100,000 sq ft Cumberland House get a pounds 34 million make-over.

When you drive out to Birmingham airport, a 166-bedroom Ramada Encore has replaced the eyesore that the disused NEC House had become.

The availability of properties at affordable prices has created a window of opportunity for hoteliers. Refurbishments, in contrast to new build, are low risk and quick to complete.

The Business Premises Renovation Allowance (BPRA), a tax-incentive-driven initiative aimed at bringing derelict buildings back into use, has also proved an incentive to operators in the sector, making refurbishment more cost effective. For landlords with dormant stock, the hotel trade has obvious attractions.

No other sector can match its 25-year, unbroken, institutional leases, with five-yearly rent reviews and, in the case of the bigger more established brands, a strong covenant allied to significant expansion.

But the hotel sector can only do so much, given the limit on suitable properties and the finite marketplace.

Given that there won't be too many more opportunities to swap desks for beds, what are the alternatives for landlords whose properties no longer make the office grade? Many landlords don't have the access to funding required or, indeed, the appetite for refurbishing space, given that occupier demand is still subdued.

For confidence to return there needs to be significant public investment.

The city's transport projects, in particular the New Street Station upgrade, will provide a massive fillip.

The proposed Birmingham Sprint scheme will see the introduction of rapid transport buses introduced across four new routes. The first of these, Birmingham to Walsall, should be operational within five years, opening up the city centre and driving regeneration along Broad Street, Five Ways and the Hagley Road.

Nor is the opportunity afforded by Birmingham's proposed Enterprise Zone to be underestimated. A city centre zone is a great coup for Birmingham and the incentives on offer could mean that schemes that have been mothballed may once again become viable.

The tax increment finance (TIF) model will also be fundamental to bringing new money into the system.

Joe Montgomery, European chief executive of the Urban Land Institute, visited Birmingham recently and urged the city to consider other ways of stimulating development. He suggested the city council's extensive land holdings, for example, could be released.

While selling in the current market might not make the best sense, if the local authority were to take an equity stake which allowed them a deferred share of any capital uplift, it would be more than justifiable, particularly since there seems to be a growing consensus that the public sector needs to take a lead on regeneration.

Investment in Birmingham continues to be focussed on prime space and locations. Consequently, secondary locations have attracted little interest in an already subdued market.

If this is to occur, the public sector must play a role. They must also be more pragmatic. The wholesale markets area is a case in point: had the city moved faster then, it's not inconceivable that this scheme could have been underway. Now is not the time for delay. Development in the city has dropped off during the recession.

We need to start planning for redevelopment and regeneration.
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Title Annotation:Features
Publication:The Birmingham Post (England)
Date:Jun 16, 2011
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