A new year is underway, but what does it hold for the regional office market?
Further growth in serviced offices outside London will be key, after regional take-up reached a record 254,000 sq ft in the first three quarters of last year. As tenants seek more flexible lease terms, it’s unsurprising that average lease lengths fell three per cent year on year in 2017. With a number of large requirements from the serviced office sector still to be met in regional cities, we expect further growth.
Meanwhile, public sector office demand should return to more normal levels after an exceptional 1.07 million sq ft of Government Property Unit (GPU) deals significantly boosted regional take-up last year (32 per cent of the total in Q1-Q3). This was a record year for the public sector as a whole and was over twice the previous 10-year annual average for the sector. There remain large GPU requirements in 2018, but they are unlikely to reach the volumes seen in 2017.
We also expect a shortage of speculative office development to drive top rents up in regional cities by an average of 2.8 per cent during 2018. Just 657,000 sq ft of speculative space under construction is set to be delivered in 2018 and competition will intensify among occupiers in search of Grade A space. There is only 1.6 years’ worth of Grade A supply across regional city centres on average; we classify anything below two years as an official shortfall.
The rise of overseas investors into the UK regions will continue, after accounting for £2.4 billion of regional transactions (45 per cent of the total) last year. A weak sterling has made UK assets more appealing, while overseas investors are increasingly looking outside Central London for attractive yields. Far Eastern investors acquired a record £785 million worth of offices across the regions in Q1-Q3 2017, the largest individual contributor to the overseas market.
Finally, with a widening gap between house prices in the most and least expensive UK regions, many workers in London are resigned to the fact that home ownership is becoming a pipedream. Nationwide estimates that the first-time buyer house price-to-earnings ratio in the capital is 10.2, almost twice the national average. For office occupiers seeking to attract the best talent, this will further add to the case for ‘north shoring’. Already Burberry is relocating finance, HR, IT and procurement to Leeds, where the ratio is only 3.7.
Savills Spotlight: Skills, Talent & Labour Mobility report forecasts that the net inflow of graduates to London will slow as regional infrastructure projects complete and workers take advantage of higher living standards by working and living in the regions.