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 Cardiff, Q1 city centre activity increased slightly from last quarter, reaching 56,000 sq ft. The volume of occupier enquiries has diminished since the end of last year whilst ongoing enquiries are failing to translate into deals.
The development pipeline in Cardiff is sparse and it is expected that the market will become even more polarised. Prime headline rents increased to £22 per sq ft in Q1, although this was achieved on a smaller letting.
Alex Easton, Associate Director, DTZ in Cardiff, comments: “Despite a difficult market, Cardiff city centre take-up was again resilient in Q1, reaching 56,000 sq ft, and although enquiries have remained patchy, there is good underlying demand for grade A space from the likes of Hugh James, Morgan Cole, Legal and General (led by lease expiries) and the BBC. With the current supply of grade A accommodation at an all time low, these requirements will be hard to satisfy unless pre-lets are agreed on new builds. In this regard, we understand that solicitor Hugh James is close to committing to a new building on the southern side of MEPC’s Callaghan Square.
He continued: “Prime headline rents also broke through the £21 per sq ft barrier in Q1, albeit for a sub 3,000 sq ft suite at 3 Assembly Square in Cardiff Bay. It is however, an indication that there will be continuing pressure on prime headline rents to rise, although throughout 2012 we are likely to see a reduction in the amount of concessions that landlords are prepared to make.”
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.