Regional UK office markets get boost from London buoyancy

Office markets in regional UK cities are set to benefit from rental growth due to the ‘ripple effect’ from London’s continued strong performance, according to a new report by Cordea Savills.

Entitled ‘The case for investing in London and the UK’s key regional city office markets’, the report argues that strengthening economic fundamentals and rental growth will continue to drive performance in London, where employment levels have now surpassed their pre-crisis peak.

Although prime office capital values in the UK’s ‘Big 6’ regional cities (Birmingham, Bristol, Edinburgh, Glasgow, Leeds and Manchester) are still 29% below their 2007 peak, investment volumes have started to pick up in the last few quarters as a growing number of firms move towards making strategic leasing decisions. However, a lack of new construction in the regions over the past four years has resulted in lower availability of quality space.

Despite this, rents in many regional cities are still below the threshold levels required for developers to supply new stock, and even when this threshold is reached, Cordea Savills expects a lag period of two to three years before supply and demand reach a new equilibrium.

The report’s analysis of previous cycles shows that rents do not actually need to be rising, or even to be at a floor, for yields to start falling. Furthermore, lower yields can start to boost capital values before occupier recovery has fully taken hold.

Jim Garland, research analyst at Cordea Savills, commented: ‘We have seen from previous cycles that regional rental recovery lags London and believe that history will repeat itself this time around. However, as occupier demand improves, the lack of new build space in the regional cities is expected to result in a stronger rental rebound for the best quality space.’

He added: ‘Although the weight of equity from overseas investors continues to flow into London, many UK institutions have been priced out of the capital and are already targeting higher yielding properties in the regions to get ahead of the curve.’

According to Cordea Savills, secondary opportunities outside London can be found in key regional cities that have strong clusters of employment in the technology, pharmaceuticals, oil, insurance and finance sectors.

In addition, pockets of stronger demand can be found in smaller university cities and South East towns with a high concentration of employment in growth sectors such as TMT.