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 Manchester, city centre quarterly take-up fell to 170,000 sq ft in Q1. There was only one grade A deal – a reflection of the much weaker demand for top grade property over the past five quarters after the glut of large grade A deals ended in 2010.
Availability is expected to fall back relatively slowly, considering the weak development pipeline, although grade A availability is likely to fall back more quickly. Prime incentives are expected fall in 2012 and the large grade A floorplates to be delivered at 1 St Peter’s Square in 2013 are likely to increase prime rents from 2013 onwards.
Rob Yates, Director at DTZ in Manchester comments: “Q1 take-up in Manchester city centre was resilient, reaching 169,891 sq ft which was 26% up on the corresponding period in 2011. The most encouraging factor of Q1 was the number of transactions recorded, with 61 deals in total, although only three were in excess of 10,000 sq ft. This demonstrates the depth and resistance of the indigenous, smaller occupier market in the city.
He continued: “Grade A stock is limited in supply with only 633,143 sq ft remaining which is largely fragmented. Conversely, grade A demand was thin with only one transaction recorded in the last quarter. That said, with an average annual take-up of grade A space of 400,000 sq ft, a shortage of prime space appears inevitable.
“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.”
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.
