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UK regional office market recovery strong with take up highest for four years

The latest research report from Knight Frank shows that the majority of the 10 cities covered in its regional report saw take up ahead of their averages, although Aberdeen and Glasgow were the standout performers despite the uncertainty surrounding the recent referendum.

Glasgow saw 219,241 square feet of take up underpinned by a flurry of key deals including Network Rail at 151 St Vincent Street and Clydesdale Bank at Granite House while
Aberdeen saw a record 647,874 square feet of take up which included two substantial pre-lets.

Collectively, 2014 is set to be the most active year for the regional markets since 2008, the report says, adding that for the majority of markets, 2014 take up to date is already above or close to the annual average for each of the previous five years.

Aberdeen has already achieved a record year while Manchester is certain to break the one million square feet mark for 2014. Birmingham, while arguably the one underachiever thus far in 2014, saw a substantial 80% rise in demand in the third quarter of the year. Leeds is also expected to end 2014 strongly.

‘Developers are responding cautiously to the growing shortage of Grade A supply which characterises the majority UK’s key regional markets. Collectively, speculative development activity climbed to a six year high of 2.2 million square feet by the end of the third quarter,’ the report says.

It also shows that prime headline rents remain under upward pressure. Two markets saw headline rents increase during the third quarter, with Glasgow rising to £29.50 per square foot and Leeds to £26.00 per square foot.

Rental growth is expected to take place across the majority of markets over the next 18 months, with new development completions securing higher prime rental levels in Bristol,
Birmingham and Manchester.

The report describes investment activity in the regional office markets as ‘exceptional’ in the third quarter with £1.3 billion of assets changing hands, the highest seen in a single quarter since the third quarter of 2007. Total volume for 2014 to date now stands at £3.1 billion, already eclipsing the annual total for each of the last six years.

‘The third quarter’s impressive turnover reflects an increase in buying opportunities since summer, as some investors have sought to capitalise on significant price increases over the past 12 months,’ the report explained.

‘While major lot sizes were key to turnover with the largest 10 deals accounting for 75%
of turnover, the quarter saw 40% more transactions than the five year quarterly average and this is indicative of the ongoing depth of investment demand,’ it adds.

Despite a substantial weight of money continuing to target regional office stock, evidence in the market suggests that pricing was broadly stable in the third quarter. Across the 10 key regional markets, prime office yields held firm, with Birmingham and Manchester continuing to command a premium over the UK’s other core markets, at 5.25%.

Pricing across the regional markets is expected to remain relatively stable over the next six months, with the increased supply of stock allowing investors to be much more selective than was possible earlier in the year.

‘Indeed, sentiment suggests that vendor’s pricing aspirations have moved ahead of reality for certain secondary assets, particularly where there is little scope for repositioning,’ the report says.

‘With evidence of rental growth returning in the core regional markets, investor appetite is likely to focus more readily on well located, short income stock where income can be enhanced through active asset management. Also, in search of higher returns, the restricted availability of Grade A stock in some markets may also tempt more investors to selectively engage in new build speculative development,’ it concludes.

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