Take up of standing office stock in Bristol last year was the second highest for 25 years, while the availability of Grade A space fell to the lowest level of any major regional city in the UK, according to the latest UK Regional Cities Review from property consultants Knight Frank.
Despite a quiet summer following the EU vote, office occupier take-up increased significantly in 2016 and, combined with limited availability, this resulted in continued upward pressure on rents.
With the highest level of quarterly take-up for two years recorded in the fourth quarter (Q4) of the year, total office take-up in 2016 reached 782,900 sq ft. This total represents a year-on-year increase of 60% and was 36% above the 10-year average. Take up of standing stock reached its second highest level in over 25 years.
Martin Booth, head of Knight Frank’s office agency team in Bristol, said: “A stellar year was further enhanced by the 107,000 sq ft lease taken by HMRC at 3 Glass Wharf, with the government department signing a 25-year term. Salmon Harvester Properties are developing the scheme, with HMRC expected to occupy the property in 2019. This was one of three deals over 50,000 sq ft to complete in 2016.”
Preceding the HMRC deal was the 81,200 sq ft letting to EDF Energy at Bridgewater House. Driven by government approval for a new nuclear power station in nearby Bridgwater, the energy firm took occupation in Q1. Following this deal, Palmer Capital and Cubex sold Bridgewater House to a private foreign investor.
The other deal over the 50,000 sq ft threshold was the freehold purchase of The Core on Thomas Street by Direct Line.
Martin Booth added: “Aided by HMRC’s pre-letting, the public sector accounted for the highest proportion of take-up at 21%, up from 17% in 2015. Professional service occupiers maintained their focus on Bristol, representing a fifth of annual take-up, whilst the TMT sector accounted for 18% of space let.
“The availability of Grade A space fell to just 52,000 sq ft by year-end, the lowest level of any major regional city in the UK. This total is 77% below the long-term average. The shortage of stock will persist in the coming 12 months. Only 95,500 sq ft of new space within Aurora at Finzels Reach, together with 100,000 sq ft of refurbished office space, is due for delivery in the coming 12 months. The first completion date is not until Q3 however.
“In 2016, prime headline rents were unchanged at £28.50 per sq ft. Given the widening gap between supply and demand, we anticipate prime rents will increase to over £30.00 per sq ft by year-end 2017.”
Although transactions in the office investment market slowed following the EU vote, total office investment was well above the long-term average in 2016. With demand remaining solid, yields were unchanged despite greater market caution.
Steve Oades, head of the Bristol office of Knight Frank, said: “Although Bristol experienced a fall in investment volumes in the second half of 2016, turnover for the year totalled £350m, 79% above the 10-year average. The largest deal of 2016 was the funding of 3 Glass Wharf at Temple Quay, which sold to Legal & General for circa £75m.”
This was one of three transactions over £25m to complete in 2016. The other two included the acquisition of Bridgewater House by a private investor for £56.3m. The deal reflected a net initial yield of 5.35%. Following this, Two Temple Back East sold for £34.1m. Bought by Ardstone Capital from Deka Immobilien, the purchase price represented a net initial yield of 5.8%. The 87,500 sq ft Grade A office building is let to law firm Osborne Clarke until 2022.
“Since the result of the EU referendum, a considerable number of UK investors have assumed a more cautious approach, which explains the below average number of transactions in H2 2016, Steve Oades said: “Demand remained relatively strong from overseas investors however.
“Foreign investment accounted for 17% of investment volumes in 2016, with the favourable exchange rate likely to support continued interest in 2017.”
Looking ahead, Steve Oades believed investment demand for Bristol city centre offices remained robust. “Whilst rental growth forecasts are not quite as aggressive as prior to the EU referendum, the market recognises the supply/demand imbalance within the occupational market,” he said.
Prime office yields currently stand at 5.25% assuming a minimum term of 10 years let to an A1 covenant, rack rented with open market reviews. Yields for secondary offices typically range from 6.00% to 9.00% depending on age, quality and location.
