According to Knight Frank’s latest ROMP report, the substantial weight of money targeting regional offices, has led to further yield compression in the regions – giving a 175 bps spread of prime yields, the largest seen in over 10 years (since Q4 2003).
Highlights:
· While the regional occupier market got off to a slow start in Q1, investor appetite for regional office stock strengthened, with turnover in the investment market reaching £1.48bn in Q1 2015. This was almost double the turnover during the same period last year, 5% higher than the previous quarter and the highest single quarter since Q4 2006.
· Birmingham and Manchester proved to be the most popular destination for investors in Q1, with two major transactions comprising VGV’s acquisition of RBS’s Brindley Place (£131m) headquarters and M&G’s purchase of 3 Hardman Square (£92m).
· Not surprisingly, given the substantial weight of money targeting regional offices, and following further yield compression both Birmingham and Manchester now command a premium over the UK’s other core markets, at 5.00%. These cities are closely followed by Bristol and Leeds, at 5.25%. At the other end of the spectrum prime office yields in Sheffield moved up 50 bps to 6.75% in Q1. This gives a 175 bps spread of prime yields, which is the largest seen in over 10 years (since Q4 2003).
· Prime headline rents remain under upward pressure. Two markets saw headline rents increase during Q1, with Birmingham rising to £30.00.50 psf and Leeds to £26.00 psf. We anticipate further rises in office rents during the remainder of the year.
· Given current named requirements of 4.58 million sq ft, which is the highest in five years, we expect to see higher levels of occupational demand in Q2 back above the five year average.
Alasdair Steele, department head of Knight Frank’s Edinburgh Commercial office had the following to say; “Our research shows that there continues to be significant demand for regional offices from both UK and overseas investors. Whilst that is no great surprise, the disparity between yields achieved in the various key regional centres is noteworthy. Edinburgh and Glasgow, both of which have a very strong occupational story, are clearly trading at a discount in comparison to similar centres such as Birmingham and Manchester. Clearly the market has been swift to build in an additional risk factor to pricing to reflect the perceived political uncertainty in Scotland. We believe the case for buying offices in both Edinburgh and Glasgow is currently a compelling one, on the basis of current pricing and likely rental growth.”