The lack of supply of Grade A space in the UK’s regional cities is currently driving significant demand for value-add office refurbishment opportunities, according to new research published by Savills.
With average take-up across the UK’s regions at 4.6 million sq ft, with availability currently down 18% on 2007 levels, there is under a year’s supply of Grade A space coming to the market in the next three years according to Savills’ Regional Office Market Review & Outlook report.
Speculative development in the regions has risen 129% on the same time last year to approximately 3.5 million sq ft, but with 28% pre-let it is expected that this will largely be absorbed in Q1/Q2 2016. The lack of available space has driven demand for value-add office opportunities to help plug the gap, with January 2016 marking the 41st consecutive month of refurbishment activity.
With competition for space outstripping supply, the gap between the rents on new build space and the best quality refurbished stock has narrowed, although it is likely to widen once more as new developments are completed later on in the year. New build office rents in Bristol, for instance, currently stand at £28.50 per sq ft (£307 per sq m) compared to £27 per sq ft (£291 per sq m) for refurbished office space, whilst in Leeds new build rents of £27 per sq ft (£291 per sq m) are only £1 higher than those for refurbished space, at £26 per sq ft (£280 per sq m).
Savills forecasts that Bristol will see the highest growth in rents of 12% by the end of 2016, followed by Cardiff at 9%. The lack of supply has also forced some occupiers to look outside CBD’s at business park locations: Savills quotes the example of Birmingham Business Park which has seen its vacancy rate drop from 75 to 15% over the last 12 months.
Clare Bailey, Associate Director, Savills commercial research, says:
“UK-wide job creation is driving demand for good quality space in amenity-rich and well-connected regional cities, leading to a squeeze on space and rent rises. By the end of 2015 rents in the M25 office market had risen 10%, Manchester by 6% and Leeds 4%, and we’re set to see strong rental growth in many other regional markets before 2016 is out. While speculative development has picked up pace, a lot is already pre-let so we’re going to see a pinch on new build towards the end of 2016 and into early 2017 when occupiers are going to have little choice but to turn to refurbished stock or possibly even pre-letting to meet their requirements.”
Savills reports that in the past year regional offices prime equivalent yields have moved in by 50 bps to 4.75%. The proportion being invested in office markets outside London has also risen over the last two years, with regional volumes in 2015 standing at 31% of market share, compared to just 16% of total volumes in 2013.
Richard Merryweather, Savills Joint Head of UK Investment, adds:
“Office investment volumes in regional cities during 2015 were 56% above the 10 year average, with overseas buyers as well as UK funds investing across the spectrum of quality and lease length, depending on their return criteria. Given occupier demand for good quality space is set to continue for the foreseeable future, we’re continuing to see investors looking for secondary assets in strong locations, where opportunities exist to fill the gap where limited new development is taking place or may create a gap in the supply pipeline.”
Download the Regional Office Market Review & Outlook report here.