Knight Frank’s latest Regional Offices report reveals that investment activity in the UK’s regional office markets reached £1.63bn in Q4 2013, the strongest quarterly total since Q3 2007.
The main driver for the resurgence of investment activity has been put down to the significant increase in fund receipts since the summer of 2013. With clear signs of that conditions are improving in the occupier markets, investors of all types are being attracted by the perceived better value offered by the regions compared with London and the South East.
The weight of money targeting the regional markets has given rise to significant price increases. Yields for prime stock have hardened by c.50 to 75 bps since Q1 2013, although it’s on going scarcity means that pricing remains largely guided by sentiment. One notable exception is Aberdeen, where a number of prominent deals for prime assets boosted investment to a record annual total of £250m in 2013.
Reflecting improving occupier sentiment during the past 12 months, 2013 take-up across the ten regional cities combined reached its highest level since 2008 and was 4% above the 10-year annual average. While Bristol, Newcastle and Glasgow all enjoyed their best year of take-up since 2008, Leeds had an outstanding year, with take-up reaching a record high of 789,530 sq ft, or 58% above its ten-year annual average.
Glasgow was the stand-out performer in the final quarter of 2013 with take-up of 367,879 sq ft. This was boosted by Scottish Power’s substantial 220,000 sq ft pre-let of its new HQ building on Vincent Street, by far the largest transaction seen across the ten regional cities during 2013.
David Porter, partner, leasing and development, commented; “With occupier confidence improving and developers remaining wary of undertaking speculative development, the falling availability of Grade A supply is now a key theme across the regional markets. Overall, Grade A supply has more than halved from its peak in 2009. The situation is arguably most acute in Leeds, although supply in Birmingham and Manchester is also under pressure in view of the high number of lease events in the pipeline”.
Henrie Westlake, partner, investment team, commented; “With rates of yield compression easing, performance will be driven more by the recovery in the occupier markets. The tight levels of Grade A supply now evident across many cities have enhanced the prospects for rental growth over the next 12-36 months. We anticipate that investors will capitalise on this, focusing on stock offering potential for active asset management, while the definition of good secondary is expected to broaden as investors increasingly seek value-add opportunities”.