Ripple effect from London set to benefit UK regional office markets

The continued rise of London’s office market will stimulate regional commercial markets as the ripple effects moved out from the capital city, according to a new report.

The UK’s key regional city office market is set to benefit from rental growth stimulated by London’s strong performance as the economy recovers, according to the report by Cordea Savills, the international property investment management company.

 The new report, entitled ‘The case for investing in London and the UK’s key regional city office markets’, argues that strengthening economic fundamentals and rental growth will continue to drive performance in London, where employment levels have now surpassed its pre-crisis peak.
   
While the report notes that prime office capital values in the UK’s big six regional cities comprising Birmingham, Bristol, Edinburgh, Glasgow, Leeds and Manchester, are still 29% below their 2007 peak, investment volumes have started to pick up in the last few quarters as a growing number of firms are again willing to make strategic leasing decisions.

However, a lack of new construction in the regions over the past four years has resulted in lower availability of quality space, it also points out.

Despite this, rents in many regional cities are still below the threshold levels required for developers to supply new stock, and even when this threshold is reached, Cordea Savills expects a lag period of two to three years before supply and demand reach a new equilibrium.
 
The report’s analysis of previous cycles shows that rents do not actually need to be rising, or even to be at a floor, for yields to start falling. Furthermore, lower yields can start to boost capital values before occupier recovery has fully taken hold.

‘We have seen from previous cycles that regional rental recovery lags London and believe that history will repeat itself this time around. However, as occupier demand improves, the lack of new build space in the regional cities is expected to result in a stronger rental rebound for the best quality space,’ said Jim Garland, research analyst at Cordea Savills.

‘Although the weight of equity from overseas investors continues to flow into London, many UK institutions have been priced out of the capital and are already targeting higher yielding properties in the regions to get ahead of the curve,’ he explained.

‘We expect average central London rental growth to outperform average regional offices but the best prime regional office markets are forecast to outperform London. We see opportunities to invest in core and core plus strategies in the regions and core plus and added value opportunities in London,’ he added.

Cordea Savills sees opportunities outside of London in prime and good secondary property in key regional cities that have strong clusters of employment in the technology, pharmaceuticals, oil, insurance and finance sectors.

It is also targeting pockets of stronger demand in smaller university cities and South East towns with a high concentration of employment in growth sectors such as TMT.