Office take up across the UK hit 4.4 million square feet in the first half of 2016, some 11% above the long term first half average of four million despite ongoing market uncertainty, new research shows.
The office market report from real estate firm Savills predicts that regional take up will reach 10.5 million square feet by the end of the year which, whilst 3% down on 2015, is still 15% above the long term average of 9.1 million.
Bristol and Glasgow, in particular, are both expected to considerably outperform 2015 take up levels by 63% and 31% respectively. UK wide take-up of Grade A space has also increased by 3.4% to 1.2 million square feet in the first half of the 2016 in comparison to the same period last year.
‘Whilst we do expect to see lower levels of leasing activity heading into 2017 as businesses take stock following Britain’s vote to leave the European Union, we believe that this is likely to be less impactful in comparison to the levels seen in 2008/2009 during the global financial crisis,’ said Jon Gardiner, national head of office agency at Savills.
Rental growth is also set to continue on an upward trajectory in the majority of key regional cities this year. Savills research shows that Cardiff and Birmingham are set to see the biggest year on year increase in 2016 at 9% and 8% respectively. This is due to good quality office product and new developments commanding higher rents.
‘As London is unlikely to see a significant rental decline, the price differential story will remain the same. Cost issues have been a major contributor to businesses moving away from the central London office market over the past few years,’ said Clare Bailey, associate director of research at Savills.
‘For this reason we will continue to see companies moving their middle and back office functions to both the Greater London and outer M25 office markets as well as to other regional cities. North shoring, in particular, will remain a theme over the medium term, as businesses seek to control costs in this more uncertain world,’ she added.
The report also shows that availability in the UK regions is at its lowest level on record, standing at 11.1 million square feet. Savills notes that whilst currently 3.3 million square feet of space is due to complete in the next three years, this is not a significant amount.
Average Grade A take up in the key regional cities is 1.5 million square feet resulting in just over two years of supply. On top of this, 35% of this is already pre-let, and in Manchester, up to 2018, this is as high as 51% and in Leeds 40%, which demonstrates continued strong occupier demand.
‘Regional office markets will be more cushioned than London, as they are less reliant on inward investment and instead are more dependent on local economic dynamics. This notwithstanding, they will be huge beneficiaries of the Government’s hub programme, which is set to produce the largest and most high profile leasing deals across the core regional cities in 2016/2017,’ Gardiner added.
Despite pre-referendum concerns, Savills states that the M25 and regional office investment volumes remained strong to the end of July 2016, reaching £3.7 billion, 37% above the long term average for this period. Bristol, Edinburgh and Manchester have all seen higher investment levels this year in comparison to 2015.
Even post the EU referendum, there is evidence of significant deals still being transacted, for instance Deka Immobilien’s acquisition of One St Peter’s Square in Manchester from the joint venture between Argent and the Greater Manchester Property Venture for £164 million.
Overseas investors have been key contributors to this increase, accounting for £2.2 billion of regional office investment to the end of July, compared to the long term average of £1.1 billion.
‘This is the highest proportion of overseas investment ever recorded in the UK regions and we believe that this trend could well continue as overseas investors look to take advantage of the weaker pound. Overall, appetite remained strong in the lead up to the referendum, which is reflected in the impressive transaction volumes we have seen in the first half of the year,’ said Mark Porter, investment director at Savills.
