DTZ Research has published its 2014 Annual Outlook report highlighting that economic growth has picked up and the UK macro outlook has improved. The findings were presented to over 180 guests at an event held at The Met Hotel in Leeds city centre.
The report revealed the outlook for the regions is much brighter than in recent years with economic growth in the regions forecast to increase by 2.8% in 2014, and 3% over the medium term whilst employment is forecast to increase by 400,000 over the next two years. Job gains will be underpinned by business services, TMT and retail, offsetting the ongoing contraction of the public sector.
As a result, occupier sentiment and demand for commercial property is generally strengthening. Take-up is growing across the regions. However, availability, particularly for Grade A office and industrial space, is falling rapidly. The report estimates that there is only 1.6 years of Grade A office space left based on current take-up rates. The retail market is also expected to see vacancy rates moderate from current high levels.
Investor appetite for commercial property assets is increasing and volumes have risen markedly. The record yield gap between London and the regions, and between prime and secondary property, is encouraging investors to move up the risk curve. However, the window of opportunity is closing as the yield gap is forecast to narrow and regional markets becoming less undervalued.
Richard Yorke, UK Head of Research at DTZ and co-author of the report comments: “Based on its relative attractiveness, investors’ appetite for commercial real estate is very strong. This is further helped by a normalisation of the lending markets. But, investors should take advantage of current pricing quickly before interest rates rise. At the same time, prime opportunities have become less attractive. Consequently, investors need to consider secondary assets and locations more closely, which are still attractively priced. Investors need to be bold and move quickly to take advantage of this limited time opportunity.”
The growing shortage of grade A office space, combined with the regional development pipeline at an all time low, means investors are now encouraged to acquire assets for development and refurbishment.
The dearth of new supply and a wave of leasing events mean that prime rents are increasing and set for further growth. The cities which are likely to see relatively rapid increases are Edinburgh, Leeds and Manchester.
Tim Cameron-Jones, Head of DTZ North Region and Senior Investment Director commented: “Leeds has been identified in our research as likely to outperform all other UK cities in terms of total returns for office investment. This is driven by a shortage of supply and a strong rental growth rebound. In retail, Leeds also has one of the greatest increases forecast for retail spending and Industrial rents are expected to return to positive growth.
“Transaction activity across the region will however be hampered by a shortage of supply. In the agency markets this will be partly met by pre-letting activity, and the ongoing delivery of high quality refurbished space. In markets where funding is tight, some public sector intervention will assist in bringing forward new development, such as Sheffield City Council’s innovative funding support to CTP to deliver 72,000sqft of new offices in the Heart of The City at 3 St Paul’s Place.”
