A number of large deals in key regional cities, including Edinburgh, Glasgow and Leeds, led to a small increase in the aggregate amount of regional office take-up in Q1 2012 to 909,000 sq ft, according to DTZ’s latest UK Regional Offices Property Times report. Despite the increase, take-up remains below the quarterly average.
The quarter also saw a predominance of grade B deals, continuing the trend of the last 12 months, with grade A transactions no longer dominant, as observed over 2008 to 2010. The rise in grade B transactions is due to the current phase of the leasing cycle and occupier priorities, as well as increasingly limited availability of well-located grade A space.
Martin Davis, Head of UK Research at DTZ said: “Lease events, consolidation, cost saving and opportunism continue to be precursors to the majority of deals. While most deals were smaller than 5,000 sq ft in Q1, a number of larger transactions led to increased take-up in Edinburgh, Glasgow and Leeds. The growing prevalence of grade B transactions is being driven by an increasing number of opportunistic mid-sized professional firms interested in the value and flexibility of the highly specified grade B space available in most regional cities.”
In Bristol, Q1 city centre take-up increased marginally from last quarter, totalling 117,000 sq ft. This figure is the highest recorded quarter since Q1 2011 and higher than the three-year quarterly average. The majority of transactions were for grade B space in units of around 5,000 sq ft.
Current requirements in Bristol suggest annual take-up in 2012 will be similar to 2011. The development pipeline is minimal but few expected new entrants or expansions in the near term suggest that availability is unlikely to fall by much in 2012 and 2013. A limited amount of grade A options in the city, means it is likely there will be an increase in prime headline rents by 2013.
Andy Heath, Director, DTZ in Bristol, commented: “The Bristol office market showed renewed levels of activity in Q1 with a relatively healthy level of take-up. The market shows signs of becoming ‘two tier’ with a limited level of grade A space currently available and, should some of the larger requirements commit to space over the next two to three quarters, speculative development could yet begin later this year. We are witnessing increased grade B activity where there are still large levels of supply, but this will hopefully lead to incentives contracting in due course.
He added: “Looking forward, DTZ has more space under offer in Bristol city centre than any other agent and we currently have many active occupier mandates. As a result, we are optimistic that take-up in Q2 will exceed Q1.”
DTZ, part of UGL Services, a division of UGL Limited (ASX: UGL), forecasts that annual regional take-up will fall in 2012 after a number of large requirements were satisfied in 2010 and, to a lesser extent, 2011. However, there are exceptions where annual take-up for 2012 is expected to be greater than in 2011. For example, in Edinburgh there is a spate of lease expiries due between 2014 and 2016 which could lead to some incumbent occupiers signing pre-lets or relocating early to secure preferred buildings. Annual take-up is also forecast to pick up in Manchester in 2012 following a dip in 2011 which was in part caused by a glut of deals in 2010. Across the regional office markets, limited grade A availability should reduce prime incentives before prime headline rents rise in 2013.
Investor sentiment remains fragile but did not worsen in the first quarter of 2012. Investment transaction volumes continue to be limited across the regional office market. Buyers of prime, particularly UK pension funds, will not compromise on location, building quality, tenant covenant or unexpired lease term, with few properties meeting all their requirements. Additionally, opportunity funds are still struggling to find suitable assets at the kind of prices to generate returns of 15% to 20%, and even where these assets are available, securing funding is difficult.
Estimated regional prime office yields were mostly unchanged across the regional office markets in Q1 and are forecast to remain stable over the summer. Recorded secondary yields are likely to drift out over the medium term, in part because valuations are arguably behind the market given the lack of transactions.
