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 Nottingham, city centre take-up increased in Q1 to a more typical level with total office lettings at 65,000 sq ft following a muted last quarter of transactions. Transactions were primarily sub-5,000 sq ft and completed by smaller firms. City centre availability continued to fall in Q1 and the market continues to be polarised between prime and secondary space.
The only grade A deal of the quarter was the 8,000 sq ft letting to architectural firm BWB Consulting at The Waterfront, which had taken the opportunity to upgrade to better quality space.
Helen Longstaffe, Director, Business Space at DTZ in Nottingham, comments: “The main characteristic of the Nottingham office market is the lack of grade A accommodation. The most recent deal of 8,000 sq ft to BWB at Waterfront continues to chip away at supply and it appears that a further 15,000 sq ft to 20,000 sq ft will be under offer soon. This means that supply in the NG1 area will be less than 100,000 sq ft. In a normal market this would be sufficient to encourage speculative development, however, at the moment this is still unthinkable. The lack of availability will continue to give city centre occupiers the dilemma of waiting for a design and build, or opting for good quality / refurbished grade B space. This is quite a selection of grade B options available, offering resultant timescale and rental benefits.”
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.
