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Based upon the comprehensive analysis of the past, present and future property market trends in Edinburgh, of the physical, economical, social and cultural opportunity or constraints, a recommendation was made as to the development of the Fountainbridge's old brewery site. This appraisal determined it is a reasonable choice for the developers to purchase the freehold, develop and then retain all properties as long term investments.
The purpose of this report is to advise DK Developments on the development potential of a property owned by Scottish & Newcastle, called Fountainbridge Brewery which is located at Fountain South East and Gilmore Park. This report will include recommendations on the issues listed below:
The best use and optimum layout of the site.
The net development value of the proposal, the potential value of the site and the project's internal rate of return.
The risks associated with the proposal.
The recommended option to peruse.
3. Description of Development Site/ Location
3. 1 History
The site to which this proposal directs attention has indeed had a very important history. This is to say, before the Fountainbridge area was developed by owners Scottish and Newcastle into the Fountain Brewery, the area was previously part of the McEwan drinking empire. This spot was considered to be prime real estate as it location provided easy access to the railway and Union Canal. Eventually, a merger between William Younger & Co Ltd saw the formation of Scottish Brewers Ltd in 1931. Which then became Newcastle Breweries Ltd in 1960 before it came under the tenure of the present owners. The brewery was finally closed in the latter portion of 2004 as a result of the competition existing in the beer market. Soon after this occurred, plans were announced in November 2005 that the site was proposed to be developed into office and residential properties. Another concept about its development was that this site would become a mini marina near Viewforth Bridge. At that time the site was to be acquired by developers AMA (New Town) Ltd, Grosvenor and the Royal Bank of Scotland at the cost of £60 million (Edinburgh Evening News). Along with BUREDI, an urban regeneration specialist, which proposed a mixed use development to be located on the south side of the Fountainbridge Brewery. Some other areas surrounding the old brewery were also included in the plans for redevelopment. They are Fountain Park and Springside which were to be located on the site between Fountainbridge and West Side Approach. Also included were the new HBOS Headquarters and Edinburgh Quay located between Fountainbridge and Union Canal. HBOS was reported to be making attempts to purchase the site at a cost of approximately £100 million in 2008.
3. 2 Current Condition
Presently, the old Brewery located at 159 Fountainbridge between Fountainbridge Road and the terminus of the Union Canal in Edinburgh is now the focus of another redevelopment plan. With a population of approximately 500,000 people, this capital city of Scotland has a very diverse landscape, both physical and cultural. However more specifically, the site of the old brewery is approximately 11,500m2 of flat land and with the exception of stray animals; this property can be considered a vacant. Its irregular shape is not presently seen in any way as a hindrance to the redevelopment potential of the property. This site is also partially bordered by Union Canal, a historically important waterway which if utilized correctly as the potential to be developed into unique transportation medium. It should also be noted that the brewery machinery was removed and their have be some partial demolition work done. The site has now been acquired by Lloyds banking group which took over HBOS last year and eventually canceled the office development idea. New plans for the site include commercial space, retail space, private affordable housing as well as student accommodation. Plans were even made for cultural and leisure activities with underground car-parking to provide more above ground space for gardens and high quality pedestrian spaces. However all of this is pending approval from the city council. It was also reported that Lloyds would not directly handling the development of the site, but instead plan to work with the Edinburgh council to ensure that the area is placed to its optimum use.
3. 3 Future Growth
Future growth of the site and by extension the City of Edinburgh has been forecasted by many economic analysis reports. The range of possible ventures includes offices, residential, retail, industrial, investment and even leisure activities. Hence this site has the possibility to be transformed into a very strategically located hub, where a wide range of interest can be promoted, developed and sustained.
4. Analysis of Market
The sections listed below seek to provide a comprehensive analysis of the different market sectors within Edinburgh. Generally, in the UK, VAT in 2010 is at 17.5%, this means it is up 2.5% from its previous standing. Other influencing factors such as economic growth remain in a slump and as such many new investments are not seemingly profitable. Thus analysis which follow seek to provide some insight into current market trend and condition which exist in the City of Edinburgh and which will have an impact on the development of the Fountainbridge site.
4.1 Retail Property Market
Therefore with respect to retail sales, there is a notable recovery occurring in this market as the wider economy recovers. However, rather than recover universally, it is forecasted that retail sales will probably remain erratic throughout 2010 and later years. Another seemingly threat to the retail market is the rise of internet shopping. This new market accounts for approximately 6% of total retail sales. Even more significant is the fact that this figure is expected to increase by more than half to approximately 13% in the year 2013. Then it is believed to eventually decline as the online market matures. However, present trends predict that the markets for retail spaces are increasing. Overall vacancy rates may have risen as high as 20% during 2009, but are now starting to recede. It is predicted that they will be as low as 10-12% by the end of 2010.
In Scotland, Edinburgh is ranked as being the second highest in with respect to the number of retail stores. That translates to approximately 2,650 outlets and consumer expenditure of about £920 million. According to CACI Retail Footprint, Edinburgh's market potential was ranked as the UK's 15th largest retail destination while it was ranked as the 2nd largest in Scotland. Estimated calculate this industry to employ approximately 56,000 persons. Developments such as Sterling, Falkirk and Fort Kinnaird Retail Park located in the south east of Edinburgh also make Scotland's top ten retail locations. Their expenditure tends to range from between £180m and £190m a year.
4.2 Office Property Market
It is forecasted that the office market in London will experience recovery in 2010; this will lead eventually to a potential shortage in 2012 of prime retail real estate. This market since experiencing lows of almost 35% in previous years, even with the existing new development have still resulted in low supply, hence there is the possibility of shortage of space. Also, with the 2010 rating list coming in to effect, London occupiers will see significant increases in Rateable value for 2010. It is expected that the City prime uplifts will be in the region of 15-20% whereas it was previously at 5-10%. Thus returning the City prime yields to a long-term average of 5.8%, with even greater returns possible if the shortages are not adequately meet.
In the office market sector, it is also estimated that the availability is at approximately 214,000 mÂ² (2.3 million ftÂ²), this is recorded as the highest level since 2003. These figures show a vacancy rate of a little over 10% of stock. This vacancy was as a result of the economic downturn. It is believed that, due to poor economic condition, it is hardly likely this situation may change. Experts predict that it could possibly take up to (3) three years to soak up the current available space and that by 2012 there is the possibility of a return in rental growth.
Notwithstanding the poor economic conditions which existed last year the take-up in Edinburgh offices were still at an average rate. Estimates show that approximately 46,500 mÂ² (500,000 ftÂ²) of floor-space was taken by office occupiers, these were predominantly in the range of sub-929 mÂ² (10,000 ftÂ²) group. The typically average according to statistics of previous years was 69,680 mÂ² (750,000 ftÂ²). These trends show a shortage in Grade A type in-town supply. Eventually, some (4) four new development added to the supply, which amounted to approximately 52,030 mÂ² (560,000 ftÂ²) more office space being added to the market.
One of the most important deals recorded last year was the sale of multi-let offices on Exchange Crescent, it was approximately 19,140 mÂ² (206,000 ftÂ²) and sold for £50million Life to German clients of Henderson Investors by Standard Life for an initial yield of 6.6%. It is expected that with many more like transactions, prime yields can return to the long term average. However this is heavily dependent on the future economic climate of the city and the availability of finance. Also it should be note that small open plan offices seems to presently be the most lucrative market as landlords offer rental options which are more flexible and at lower rents.
4.3 Industrial Property Market
From the reviews given by various studies on the state of the industrial property market, it can be said that this market has not seen significant improvement since the economic downturn. In fact, most of the activity in this market is due to the occupancy of the smaller scale warehouses i.e. spaces under 20,000 ft2. This is not to say that the market for warehouse space over 100,000 ft2 has dried up. As what has actually happened is that trends are increasing show that the drivers of this market are not the waste management and recycling sector as compared o the food retailers in previous years. Also major signs of activity in this market have been confined to prime location where the supply is smaller.
From the above analysis, it can be argued that some markets have seen substantial recovery, while other seem to possible be about to make a comeback. However the above research also points to a decline in other markets as well. Taking for example the Retail property market where despite current market conditions, there is still an underlying need for new floor space in selected towns and markets in the short to medium term. Also, with respect to longer term, problems could arise through excessive new floor space being delivered at the same time. In terms of the Investment property market the supply of good modern space was still in short supply, however this was a pre existing condition of this market. As such, this problem was further worsened by the fact that no new developments have been brought on stream to add to the supply. The Office property market suffered problems similar to the investment market as the shortage in supply seems to have improved the markets growth. As now several office developments seem to be in the works and project growth figure are expected to hold for the next couple of years.
5. Proposal of Development Site
Based upon my research of the market conditions which presently exist, it is my opinion that that best use to which the site in question can be redeveloped into is an ultra modern mixed used facility offering office spaces and retail spaces. Provision should also include the landscaping of a suitable garden, which when combined with the strategy location of Union Canal can provided and support a wide range of family and leisure activities. This I believe will enable the location to be prominent commercial centre as well as a new tourist attraction. After all, this city was given the title of Europe's Best Small City for a second consecutive year and also got the Best Economic Potential title. All this despite the world current economic situation are very noteworthy achievements which speaks volume towards Edinburgh's future growth and development.
As such, this proposal based on the above mention plans for the old Fountainbridge Brewery site, seeks to show how economically viable and physically suitable the proposed redevelopment is for the City of Edinburgh.
This proposal also seek to maintain and protect the archaeological interest i.e. Union Canal and by extension where possible to protect any existing wildlife and even where possible to the controlled development of new ones.
The mixed use development seeks to meet the needs of an ever changing market through the provision of the following:
A two (2) storey building which provides accommodation for retail / commercial activities on the ground floor as well as office units on the top level located at the western side of the property. (and which can be accessed from Gilmore park, fountain bridge as well as the union canal)
The building orientation to the portion of the site seeks to take full advantage of the potential solar energy provided by the sun. (This feature has an added cost benefit as it reduces the cost per meter square of construction and is also provided energy lighting to building at a lower cost.)
The site will also contain all the amenities of a modern park. This is to say, foot paths, benches, covered walkways and even some night lighting will be provided. This is all in an effort to encourage pedestrian traffic in and around the development.
The retail portion of this development will contain accommodation for a wide variety of business owners / operators. As while the business which will be obtained from tradition retail activities are important to sustain the development. Business with diverse interest such as tourism and recreational will also be accommodated.
The presence of the park seeks to provide a suitable frontage to the canal side of the development as well as a scenic backdrop to the main building.
This new development will have access points at the north, south and west of the property. This is to say pedestrians will be able to enter and leave the site from Gilmore Park, Fountainbridge as well as Union Canal. This design is to promote the use of the existing transportation system in this area as this area is already heavily congested with vehicular traffic. As well as encourage more alternative form of transportation such as walking or even cycling. Hence the provision of foot paths will be used to connect the different boundaries to each other. Allowing pedestrian to freely move about the site in the process of conducting any range of activities provide at the site. This will also provide ample linkages between the existing developments, with minimal invasion to their privacy. As such is the case with the development site on the eastern boundary and the existing tenement properties located on part of the northern boundary.
Therefore the proposed layout of the development considers the fact that current and future economic climate of the city as well as a suitable way to ensure that the new development can compete with an also complement the city's landscape by:
Creating some open essential open space which combines park amenities with commercial activities.
This is a step towards a green environment and in so doing reduces the carbon city's foot print.
The creation of sustainable development through the use of solar energy and natural lighting to the development.
Encourage a wide range of health nightlife activities in a safe and comfortable environment.
Phasing of the site is not seen as the feasible option as many of the surrounding properties development plans have been place on hold until the better economic conditions return the projects to more profitable economic viability. This and other factor may have also contributed to the fact that there are a lot of underused residential accommodations. However this may be due to the high rate of unemployment due to the economic downturn in the previous years. But the economy is predicted to experience growth slowly at first but eventually leveling out as the unemployment figures recede. Hence, if the current vacuum is to be capitalized upon time is of the essence and the development should be completed in its earliest possible time. This development is estimated to require a twelve (12) months design period, two (2) years construction time and six (6) months letting delay. The retail and office building should be completed within the first year along with the waterfront landscaping. The park facilities would be completed last as it requires more time to be spent on properly decontaminating the area to ensure that the flora, fauna and wild life can be maintained and protected.
6. Development Appraisal
Please refer to the attached appendix for the calculations which support this development appraisal. The lists of attached tables are listed below;
The Data Sheet
The traditional RSV Budget
The Cash flow Appraisal
The DFC cashflow
The Period by period table
The Period by period including site value
The Internal Rate of Return
As previously mentioned above, the site area is approximately 11,500 m2 and has an irregular shape. As such for the purpose of optimizing the development site in a way such that the structure constructed maximize the space available and still provide adequate land to develop to park. Adhering to the height restriction provided in the brief of 16 - 19 meters, this will comprise of a single 4 levels to provide a combination of retail and office spaces requiring floor to floor height of approximately 4 meters. Using the plot ratio of 3:1 with respect to the calculating the number of floors the building will contain, the floor area was the calculated. This is to say multiplying the site area by the plot ratio the maximum possible floor area the entire development. This figure can be further divided by the number of level in the building to determine the main external dimensions of the building.
The shape as well as the orientation of the building was also chosen in an attempt to optimize the existing landscape and building requirements. Firstly, the proposed shape of the development takes into consideration the features plan for the development namely the park. Secondly, the building's orientation was designed capitalize on the solar energy provided by the sun i.e. sustainable / renewable energy for the development.
The allocation of the building is so set up to facilitate both the commercial/ retail activities and offices in position which can be used to their advantage. Therefore the commercial/retail will be placed on the bottom two (2) levels while the remaining top floors will be developed into Grade A office space. The retail and commercial levels will have a wide range of shop spaces in an effort to cater to the wide range of business sizes which exist in the city. This will also help to diversify the types of services which are available to consumers. Also, being located on the lower levels is a strategy which is employed to attract more pedestrian traffic. As research show that consumers as less likely to visit stores the higher up in the building they are located. Whereas the upper two levels which have been allocated to offices are so done to ensure that a certain degree of privacy can be provided the future occupiers. Also offices do not rely on the ease of entry and circulation provided by retail outlets.
The cost of landscaping to this property was not included in the development appraisal. Since not access to the site was allowed, the full extent of the ground condition cannot be fully accessed. Even though a sum was provide for the decontamination on the site, this figure is not assumed to be based upon any certified environmental assessment report. However since this portion of the site is scheduled to be developed last, it is not seen as have any significant impact on the RSV data. Its location is also strategically located that it may be restricted from public access until such time it is deemed suitable for use by the city council.
It should be noted that all figure, percentages and other values used in this appraisal were obtained from references placed in the appendix.
Given the current economic climate, it is only reasonable that the developer be informed about the factors which will influence their project's feasibility. Some factors which the risk analysis will inform the developer about, with respect to its sensitivity to change are rent, yield, construction cost, interest charges, letting delay and inflation rate. For example, if set letting period is not sufficient or the developers are unable to secure occupants for their developments, this will influence the project's profit. Also, in terms of construction cost, only when a tender price is agreed to by a contractor, can some of this rick be reduced. The remaining risk tends to become less as the project progress through its design phase to construction phase.
The risk analysis done for this development proposal revealed that some values were more sensitive to change than other. These factors were rents and yield. This was noticed when different percentage values of change were applied, those two showed the most significant changes. For further information please refer to risk analysis in the attached appendix at the end of the document.
Sensitivity analysis can also be carried out to show how different variables can influence the development. These can charts can give either positive or negative results depending on which variables are changed. If the results are negative, this should be use as an indication of the project risky feasibility with regards to certain criteria's. Notwithstanding this, these types of analysis procedures have their shortcomings. This is due to the fact that they cannot a combination of the risk, which will include several variable changing (as it is more likely that several may change than just one). Or even measure the distribution ranges of the outcome, instead of just giving its limits. However, in attempt to produce a more accurate and dynamic analysis, the Monte Carlo or Stochastic method can be employed and the data produced used to support that given from other approaches.
8. Conclusions/ recommendations
Option one is not a very realistic option because as stated above the price, market condition which reasonably predictable, do not always follow the estimated trend. Therefore this venture will be a very risky option. As in order to reclaimed the money spent and a suitable profit margin, the developers will have to do further detail study in an attempt to pinpoint exactly what market condition will exist and the completion date of the development and the extent to which the new development will be utilized by the market. It should also be noted that there are certain restriction on the land use which will prevent many option at development of the site to be explored. Hence leaving parameters which may not allow developers to put the site to its option use in ordered to make it profitable.
The last option of not acquire the site is also in my opinion a very feasible one since this type of development is not very unique as there are several development around which offer similar servicers. Many of these are also currently struggling to make it regardless of the fact that the worst of the economic downturn seem to be behind us. Therefore, if all these development are competing in similar market, which eventually has a supply that surpasses, this market can become very unattractive. As a situation is created whereby landlord will be force to let prime retail property at rents below the market value. In so doing, this changes the market into one where the tenants have a greater advantage. Thus the safest invest, is sometime choosing the option not to invest.
Phasing the development may not be a great idea as now there are several other developments in the works. What may be a viable option is to try to construct and let the building before the completion of the other development adds completion, as this may lead to oversaturation of the market. If this situation did not exist then phasing of the development would have definitely been considered. As phasing of a development can provide allow the developer to use money earned from one portion of the development to finance other portions and to an extent make it more competitive in the market.
Conclusively based upon my research, it is my recommendation that the best option for the developer is to choose option two. In this option the developer purchases the freehold property, develops it and then retains all the properties as a long term investment. The other options while possible are not economically feasible. As the studies of all the relevant markets show that steady increases in the rental values of the properties have started and will continue to do so for some time to come. Therefore, even thought the current price of site acquisition is quite high, a long term investment in the property could see the developers reclaim this sum in the future.