UK – Evidence is building of a broader recovery in the commercial property market as many investors shift their focus to opportunities outside London, including regional offices.

Investment Property Databank (IPD) revealed today that total returns for the second quarter (1.9%) were at their highest since Q2 2011.

Capital values increased by 0.4% over the three-month period bringing the 18-month decline to an end.

Greg Mansell, vice-president and head of applied research at IPD, told an audience of more than 100 industry participants in London that the results were "not stellar by any stretch of the imagination, but it's building on previous momentum".

On releasing the results of the latest UK Quarterly Property index, IPD said the figures would "add to the list of economic indicators showing the UK's economy is on the mend".

Significantly, the IPD data show that the recovery was not only led by the London market, but also driven by growth in selected regional markets.

Mansell said "the biggest improvements were in the South East offices and industrials".

Offices outside London were still in the bottom-five worst performing market segments, but he said "they were moving in the right direction".

A new transaction-based price index launched this week by Real Capital Analytics (RCA) and Property Data suggested capital values had risen at a roughly similar level, at 0.3%, and RCA reported that regional office pricing might be "staging a rebound".

It said: "The sentiment for office properties outside of Central London also appears to be changing. Prices for office ex-London have increased 19.6% over the past year and recorded strong gains again in Q2."

The suggested change in fortunes for regional offices is also supported by a Q2 survey of prime rents and yields by CBRE, which showed rental growth and failing yields extended beyond London and the South East for the first time since the downturn.

Aleksandra Starczynska, analyst at CBRE Research, said: "These results show a more widespread recovery in the UK property markets is starting to become apparent."

A number of real estate fund managers are mulling the potential of dedicated regional office strategies in the UK.

Patrizia is managing such a strategy in a joint venture with US hedge fund Oaktree Capital.

Alice Breheny, head of global property research at Henderson Global Investors, told the IPD quarterly index briefing today that the pricing of regional offices looked attractive.

"If we compare them with Central London, for example, where yields are well below their long-run averages and somewhere close to the bottom end of their historical range, they are starting to look very expensive, and investors are finding it very hard to find value to make returns stack up," she said.

"When we look at some of the regional office markets, we can see that rents are below their long-run average and at the upper end of that range and so offering pretty good value in some cases, given that we expect them to return to positive rental growth and given the constrained supply in some of these markets."

Breheny said there had been a noticeable shift among investors in favour of strategies that ventured "outside that very core, prime area, quite simply because we can't meet their return requirements in the super-prime trophy buildings".

She said, until recently, convincing investors to move up the risk curve had been "like pushing against a brick wall", albeit understandably given the ongoing market and economic uncertainty and risk aversion of recent years.

"It's been very difficult," Breheny added, "but, all of a sudden, we do see that people are asking us questions about non-prime, good secondary, and they are certainly happy to talk to us about it."

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