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 200 guests at an event held at The Lowry in Manchester 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.
Bruce Poizer, Senior Director and Head of DTZ’s Investment Agency team in Manchester comments: “It is a very exciting time for the North West investment market which is significantly undervalued at the moment.”
“A number of recent Manchester city centre transactions have demonstrated the speed at which the market is correcting. Of particular note was the acquisition of Sunlight House by Scottish Widows for £34million reflecting an initial yield of 6.5%.
“This landmark building was always going to attract strong competition from a significant number of investors seeking value in the regional markets. It was also notable that the investment was acquired by an institution rather than one of the more opportunistic funds that, until recently, might have been a favourite to buy a more active management building of this nature.
He added: “It is not surprising to see investors targeting larger Manchester city centre offices in the first instance but this is representative of a wider interest that will filter across all regional secondary markets in due course.”
DTZ Research also revealed that the outlook for the industrial market is positive with increased manufacturing activity and export orders leading to strong take-up of Grade A space. However, as with the offices market, a lack of available Grade A space (in the North West it is 1.6% of total availability) the options for occupiers seeking existing grade A stock are severely limited. Meanwhile, retail spending will continue to increase with some high streets seeing falling vacancy rates in 2014.
