This together with the diminishing availability of Grade A stock and lack of significant speculative development completions over the last few years is driving rental growth across the regions, according to the latest report from Knight Frank.
The real estate firm expects to see strong rental growth in the majority of regional city centres over the next 12 months, with new development completions securing higher prime rental levels. Manchester, Birmingham, Newcastle and Aberdeen will see the strongest growth while all other centres, apart from Sheffield, will see positive growth.
Prime headline rents in Manchester and Aberdeen are expected to reach record highs of £34.00 per square foot by the end of 2015, representing corresponding increases of 10% and 6% over the year.
Birmingham offices will also see rents rise by 8% to a seven year high of £32 per square foot. While there is unlikely to be any rental growth in Sheffield in 2015, Sheffield rents are expected to rise more sharply up to £22 per square foot by the end of 2016.
Given the diminishing availability of Grade A stock and lack of developments, vacancy rates are likely to fall or at least remain stable, with the exception of Aberdeen where the level of speculative development is higher, the report points out but the firm is also anticipating a slight softening of incentives over the next 12 months.
‘As economic growth spreads to the regions we expect to see prime office rents rise across regional city centres in 2015. Lack of supply at the prime end of the market will add further upward pressure on both prime and secondary rental growth,’ said Louisa Rickard, associate, commercial research, Knight Frank.
According to James Robert, Knight Frank’s chief economist, office rents will rise across regional city centres in 2015. ‘Lack of development to date could quickly migrate growth from prime to secondary,’ he says in the firm’s latest UK market outlook report.
He explained that while the punchy rebound seen by commercial property in 2014 is encouraging, the recent figures from IPD are not sustainable in the long term. ‘The total return numbers may accelerate a little further, but we expect them to drop back early in 2015, perhaps picking up again in the autumn on rental growth. This will be due to slower capital growth as investors acknowledge that prices have rebounded from the double dip period. The slow and methodical business of increasing value by asset management then begins. Note though we are predicting a deceleration not a decline,’ Robert said.
‘A year ago one could only speak meaningfully of rental growth in central London, but in 2014 we saw it re-emerge for prime in many M25 towns, Birmingham, Glasgow, and Leeds. The economic recovery has transmitted well to the wider UK in the last year. Consequently, we expect office rents to rise across the regional city centres in 2015, and lack of development to date could quickly migrate rental growth from prime to secondary,’ he added.
While he expects further austerity to come after the general election, he points out that the spending cuts of the current administration did not prove as damaging to growth as many feared.
‘The same will probably be true of the next round of savings. Also, there will be election upside for property, such as the drive to build up a Northern powerhouse. Manchester could offer opportunities given the proposed new technology institute announced in the budget, and similarly the new theatre will be good for local retail and leisure,’ added Roberts.
