Improved activity in the regions

Activity in the key regional office markets has maintained in Q1 2013.

Knight Frank’s Regional Office Market Report reveals that, for many cities, the office market saw improved activity and a notable rise in take-up in the first quarter of 2013. A number of markets have performed well and saw Q1 take-up exceeding 2012’s quarterly average including Bristol, Leeds, Manchester, Sheffield and Newcastle.

Across the regions, prime headline rents have been broadly stable during Q1, however, an increase in net effective rents have been recorded, particularly in Cardiff and Birmingham, reflecting falling Grade A supply together with steady levels of demand.

There has been a slight increase in the supply of Grade A space in Q1, totalling 3,067,043 sq ft compared to 3,013,043 sq ft in Q4 2012, an overall 11% decrease year on year. A lack of new completions has resulted in double digit falls in Grade A availability noticeably in Birmingham (-33%), Leeds (-14%), Glasgow (-13%), Manchester (-13%), Newcastle (-12%) and Liverpool (-10%).

Q1 saw a healthy level of requirements with a remarkable increase witnessed in Newcastle (60%) and Aberdeen (36%) although the majority of interest is up to 5,000 sq ft.

David Porter, Partner, Head of Knight Frank’s Manchester office said: “With virtually no speculative development we are now into a full pre-let market for those occupiers seeking Grade A Office space of, say, in excess of 50,000 sq ft, or less in certain regional centres. The lack of good quality accommodation is driving interest from some of the larger UK developers who see the more active regional markets, such as Manchester, Aberdeen and Birmingham as an attractive offer outside of London / South east. The likes of Hines, Development Securities and Tristan Capital are all active in the regions, typically in joint venture developer roles alongside a local property company or local authority. Similar to others they are keen for more opportunities, especially where they can assist the landowner in providing credibility to the overall delivery of a scheme. The occupational market does continue to move forward and with diminishing supply of all grades of property, we are witnessing a distinct hardening of rents and incentive levels, particularly in the prime cores.”

Investor sentiment in Q1 2013 has improved with strong investor demand in prime office stock continuing. Total turnover was £600m outside London and in the South East, an increase on Q1 2012, however 30% below the ten year quarterly average. Foreign investment interest in the regions is increasing compared to a year ago, although it remains to be seen as to whether this marks the start of more sustained interest from foreign investors in the regions.

Prime regional office yields were largely unchanged, albeit there were some tentative signs of improved sentiment for prime stock. Birmingham and Manchester both saw yields move in by 25bps to stand at 6.25% (6.50% in Q4 2012). Newcastle was the only city to see prime yields soften in Q1 to to 6.50%.