Office pre-letting returned in strength during the first half of 2015, led by a spike in demand from the banking and finance sector, according to CBRE, the commercial property and real estate services advisor.
CBRE reports that strong economic growth and widespread business confidence during 2015 have resulted in strong levels of occupier take-up across the regions. Deals from the banking and finance sectors (19%), along with business services (16%) and professional services (24%), accounted for 59% of total activity in H1.
Leeds is one of the UK cities which has benefited from this acceleration of office take-up by financial and professional services, with the pre-lets of Addleshaw Goddard (51,531 sq ft) at 3 Sovereign Square, PwC (49,650 sq ft) at Central Square, Wellington Street and Equifax (19,784 sq ft) at 6 Wellington Place.
Jonathan Shires, Senior Director of Office Agency at CBRE Leeds, comments;
“Take-up in Leeds over the past two years has been good; with a record level in 2013 and another above trend performance in 2014. Although the first half of 2015 shows a total of 359,382 sq ft was acquired for occupation (61% higher than the long term half year average) the level of active enquires received has been poor compared to normal.”
CBRE states that demand has come from a handful of occupiers seeking larger units of space, but in the main from those seeking space in the sub 5,000 sq ft category. It is anticipated that pre-lets will bolster take-up figures in the city centre as there are numerous larger lease events on the horizon. At present demand is originating from existing Leeds companies looking to co-locate and upgrade their accommodation with limited new entrants being seen. This could change in H2 as there are a number of unnamed agent led requirements for occupiers not presently in Leeds.
Jonathan continues; “The city centre market continues to be driven by pre-let activity with Addleshaw Goddard, PwC and Equifax committing to a total of 122,000 sq ft or 50% of the Q2 2015 take-up. Strip out the larger activity and the deal profile is dominated by the sub 5,000 sq ft sector which accounted for 85% of the transactions in Q2 with most seeking budget / value space. Leeds remains very competitive in terms of overall occupational costs, and with more availability on the horizon in 2016/17, Leeds will once again provide occupiers with the broad spectrum of stock making it attractive to companies looking to relocate from more expensive UK locations.”
Employment in Leeds is projected to grow significantly with a 0.74% increase by 2019. This puts it ahead of European cities such as Amsterdam, Brussels and Frankfurt. It is also the cheapest of the big 6 cities in terms of headline rents and therefore represents an opportunity for occupiers to save money.
Supply constraints in the Leeds market are now being dealt with. There are five buildings currently on site at Wellington Place (No6 & No5), 3 Sovereign Square, 6 Queen Street and Central Square. These buildings total some 540,000 sq ft of which 170,000 sq ft is let or under offer presently. There is also one significant refurbishment due to complete in 2015 at East Parade which will add a further 45,000 sq ft of space to the market. 2016 will see 1 The Embankment (former KPMG building) refurbished and City House will follow.
Alex Whiting, Senior Director of Capital Markets at CBRE Leeds, continues;
“The Leeds office investment market remains buoyant, driven by a progressive local economy and solid occupier demand. Rental growth prospects continue to attract investors with headline rents at £26.50 per sq ft. Interest from both UK funds and UK property companies with overseas equity providers is strong and we are also seeing a number of high net worth local and overseas buyers starting to acquire older office buildings for residential conversion. At the smaller end of the market a number of local investors are starting to come back into the market for sub £3m assets.”
“Stock levels in the market continue to be limited. H1 deals totalled £80.5m with the most notable deals being the sale of the The Mint, comprising 117,500 sq ft let to Asda and Dart Group sold to Oxlo/ Patron Capital for £30.8m (7.46%), the sale of the multi-let 2 City Walk comprising 64,000 sq ft to Kames for £19.4m (6.75%) and the sale of 15/16 Park Row comprising 26,000 sq ft let to the University of Law.”
CBRE concludes that investors will be looking for value add opportunities but could be constrained, both by a limited supply level and by pricing aspirations of some vendors. Given the current level of demand and supply dynamics it is likely that the prime yield will move towards 5.25% by the end of the year.