Forecasts from Knight Frank research have been proven correct as the resurgence of investor interest in the UK regions continues with attractive pricing and strong fundamentals playing a key role.
The diminishing supply in the regional markets, coupled with an almost non-existent development pipeline bodes well for future performance. Meanwhile, as some sectors of the London market are viewed as overheated, a growing number of institutional investors are looking to the regions.
There are positive signs emerging in the UK regional property market, which sit alongside more optimistic reports on the UK economy. According to the CBI, the economy is forecast to grow by 1.0 per cent in 2013 and a further 2.0 per cent in 2014.
Ashley Hudson, head of Knight Frank’s Birmingham office, says that though stock selection has never been more critical, there are genuine opportunities for well advised investors to find value in the key regional centres.
He said: “In 2013 so far, a growing percentage of assets in all sectors outside London are performing well which will lead to further confidence and selective recovery in the regional property markets.
“This is supported by the latest stats from the IPD which state that returns have improved for offices, retail and industrial sectors. This is put down to an easing of rental falls and improving investor sentiment. The data shows that the proportion of assets in the UK regional markets delivering flat or positive growth and, more significantly, a higher income return than London, equates to over 30 per cent.
“Most recently, there has been considerable interest in regional assets due to their relatively high yields, but investment has been cautious due to concerns over the wider economy impacting occupier demand and a lack of rental growth.
“Meanwhile, in terms of deal activity, the flow is largely coming from rebalancing portfolios and lease events such as re-gears; and previously unfundable covenants are now being considered in pre-let negotiations.
“What marks 2013 as different from 2012 is that investors are actually debating whether to be bullish or bearish – a year ago the bear was assumed to have a monopoly on wisdom.”
IPD stats are further supported by Knight Frank’s quarterly ROMP data which examines activity in the key regional office markets and which reports that investor sentiment has improved with strong investor demand in prime office stock continuing.
Overseas investor 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.
Prime regional office yields were largely unchanged, albeit there were some signs of improved sentiment for prime stock. Birmingham saw yields move in by 25bps to stand at 6.25 per cent (6.50 per cent in Q4 2012) and most recently the 6% barrier has been broken for the first time with 84 Colmore Row going under offer at sub 5.75%.
The occupational market is witnessing increasingly aggressive activity. In Birmingham, an increase in net effective rents has been recorded, which reflects falling Grade A supply together with steady levels of demand and little development pipeline.
Jamie Phillips, partner in office agency, added: “With virtually no speculative development, we are now into a pre-let market for those occupiers with a Grade A office accommodation requirement larger than 50,000 sq ft.
“The lack of good quality accommodation is driving interest from some of the larger UK developers who see the more active regional markets, including Birmingham, as an attractive offer outside of London and the south east.
“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.”