Refurbished office space outstrips new build across the UK regions, says Savills

18 July 2017

According to Savills, 38% of the total speculative office space being delivered in UK regional cities over the next three years will be in the form of refurbishments, which is set to lift average rents across the country.

There continues to be a lack of appetite for speculative development with developers becoming increasingly cautious over the feasibility of new build schemes. However, despite this Savills notes that there is still a sustained level of demand for space in many of the regional cities alongside an increasing lack of stock. As a result, this is influencing demand for refurbished office buildings.

The market is starting to see a new generation of refurbishments, which offer higher quality product than seen previously and consequently ‘back to frame’ schemes are now becoming interchangeable with new build stock. One example of this is Helical’s ongoing refurbishment of Churchgate House in Manchester, the works have moved the asset from an historic rolling void of circa 20% to now being fully let with occupiers attracted to new features including collaborative working areas and a focus on amenity.

Savills research shows that take-up of refurbished space accounted for as much as 25% of Grade A transactions in Manchester during 2016, making it a significant contributor to the market. Savills anticipates that this proportion is likely to increase during the next 12 – 18 months. Key deals of this type in Manchester include Kier taking space at 81 Fountain Street in 2016 and Flatshare taking space at Dale House earlier this year.

Mat Oakley, head of commercial research at Savills, comments: “In the absence of new space, we have seen a number of comprehensively refurbished offices of Grade A quality delivered including the 120,000 sq ft Programme scheme in Bristol and 56,000 sq ft at 55 Spring Gardens in Manchester. This influx of refurbished space has helped to satisfy the trend for non-traditional office accommodation both in city centres and out towards more fringe locations such as Great Charles Street and Suffolk Street in Birmingham, which are becoming increasingly popular with occupiers looking for non conventional office space.”

This in turn has had a notable impact on rents, with refurbished rental growth now outstripping new build rental growth in some UK locations. For example, Savills has seen refurbished rents in Bristol rise by as much as 51% over the last five years from £18.50 per sq ft (£199 per sq m) in 2012 to £28 per sq ft (£301 per sq m) in 2017. This has closed the rental differential with new builds from £9.50 per sq ft (£102 per sq m) to only £0.50 per sq ft (£5 per sq m) in this time period. The same story could be seen in Leeds until Q2 2017, when new build rents jumped from £27.50 per sq ft (£296 per sq m) to £30 per sq ft (£323 per sq m). Savills believes that this top rent increase can be attributed to the low differential, which has subsequently risen from £0.50 per sq ft (£5 per sq m) to £3 per sq ft (£32 per sq m), re-rating the local market.

For this reason, the UK regions are likely to see a step change in top rents driven by both the shortage of new build product and record low differentials between refurbished and new build office space. Consequently, Savills expects new build rents in Bristol to reach £33.50 per sq ft (£360 per sq m) by the end of 2018, reflecting an 18% increase on current levels.

Jon Gardiner, head of national office agency, adds: “It is widely accepted that the UK regions are currently at their lowest level of  Grade A availability on record, which has reduced the relative risk of refurbishment projects. In a time where returns will be income led, we are seeing more of a ‘flight to quality’ as landlords comprehensively refurbish secondary space in order to attract and retain tenants. This in turn maximises rental income, attracts better covenants and enhances the capital value and longevity of the asset.”

 
 

General Enquiries

Savills Margaret Street

 

Key Contacts

Jonathan Gardiner

Jonathan Gardiner

Head of
National Office Agency

Savills Margaret Street

+44 (0) 20 7409 8828

 

Mat Oakley

Mat Oakley

Director
Commercial Research

Savills Margaret Street

+44 (0) 20 7409 8781