The Capital has benefited from higher investment levels than in 2015
According to Savills latest Regional Office Market Spotlight, office take-up across the UK hit 4.4 million sq ft (408,773 sq m) in the first half of 2016, 11% above the long term first half average of 4 million sq ft (371,612 sq m), despite ongoing market uncertainty.
Savills predicts that regional take-up will reach 10.5 million sq ft (975,481 sq m) by the end of the year which, whilst 3% down on 2015, is still 15% above the long term average of 9.1 million sq ft (845,642 sq m). 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 sq ft (111,483 sq m) in the first half of the 2016, in comparison to the same period last year.
Jon Gardiner, national head of office agency at Savills, said: “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 EU, we believe that this is likely to be less impactful in comparison to the levels seen in 2008/9 during the global financial crisis.”
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.
Clare Bailey, associate director of research at Savills, said: “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 and 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.”
Furthermore, availability in the UK regions is at its lowest level on record, standing at 11.1 million sq ft (1.031 million sq m). Savills notes that whilst currently 3.3 million sq ft (306,580 sq m) 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 sq ft (139,354 sq m), 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.
Gardiner said: “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”
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.
Mark Porter, investment director at Savills, said: “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.”
Keith Dobson, director in the office agency team in the Edinburgh office at Savills, said: “Edinburgh’s office market continues to be a tale of limited supply and healthy demand, driving pre-lets on several new schemes, an uptick of interest in the out-of-town market and a search for refurbishment opportunities in the city centre.”
David Cobban, director in the office agency team in Savills’ Glasgow office, said: “Glasgow enjoyed a strong start to the year, with take-up reaching 430,000 sq ft, 57% above the first half five year average for the city centre. This was driven by the 155,000 sq ft pre let of the Bothwell Exchange to Morgan Stanley, the largest office deal in the UK regional city centres in the first half of 2016. Only 130,000 sq ft of new Grade A offices remain available which will influence take-up activity in the second half of the year however, high-spec refurbished options coming to the market shortly will mean there are still good options for occupiers. We expect total annual take-up for 2016 to outperform last year’s figures.”
Simpson Buglass, director in the office agency team in the Aberdeen office at Savills, said: “In contrast to Glasgow and Edinburgh, the office market in Aberdeen continues to suffer from low levels of demand and consequential over-supply at c.2m sq ft. In terms of the local property market Brexit was a relative non-event as focus remained firmly fixed on the fortunes of Brent Crude price recovery. That said a depreciated pound has undoubtedly made our exporters more competitive and with oil and gas uplift costs proportionately cheaper against a product priced in $US the exchange rate adjustment will have been a benefit to the UK oil and gas sector which has a major influence over the Aberdeen property market.
“Those companies in a position to move office are definitely showing a distinct preference towards higher quality products which in turn must marginalise functionally and economically redundant office stock towards extensive and expensive refurbishment or else demolition and redevelopment. The spectre of vacant property rates in a challenging market may propel many building owners down the demolition and redevelopment route.
“The few transactions which have taken place and office requirements which are circulating have been driven by occupier events such as lease terminations and break-options, and with landlord’s competing for tenants it is undoubtedly the best market for years for those office occupiers in a position to consider a move.”
Nick Penny, director in the investment team at Savills Scotland, said: “In line with the other regional markets, Scotland has seen the greatest volume of overseas investment ever recorded 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 transaction volumes we have seen in the first half of the year. Since the end of June, the principal prime office investment buyers have been overseas, with Triuva acquiring Waverleygate and non domestic money buying Princes Exchange / New Uberior House in Edinburgh.”