Office take up report 28th February 2013

The total take up of Grade A offices across the UK’s six key regional markets in 2012 was not enough to let up the Shard in London by 100,000 sq ft, but there are signs of green shoots for both the occupier and investment markets in 2013.

According to Jones Lang LaSalle’s wide-ranging Big Six report, unveiled at its Warwick Street offices this morning, a pick up in consumer income will see regional office employment grow from 2014 helping to increase demand for office space and rental levels for prime space.

On the investment side, foreign investors are increasingly dominating the landscape in the manner that they are in London, a feature that will put pressure on yields. Despite the positive note, however, the figures for 2012, which focus on the markets of Birmingham, Bristol, Edinburgh, Glasgow, Leeds and Manchester, starkly illustrated the challenging environment. Take-up volumes across the Big Six markets totalled 3.2m sq ft in 2012, up 4% compared to 2011.

The total number of deals was also up but JLL director Jeremy Richards pointed out that the reasons regional agents would say it had been a tough year was a reduction in the number of larger deals and Grade A lettings with just 53 deals over 10,000 sq ft compared to 57 in 2011. JLL said all Grade A take-up in the market would have failed to fill up the 900,000 sq ft Shard in London by 100,000 sq ft. Across the Big Six, grade A activity accounted for just 25% of total volumes. In Glasgow, there were just two Grade A lettings and in Bristol just five.

Richards said: “The picture remains mixed in terms of office take-up with considerable regional variation. Edinburgh was the strongest performer in 2012, as the only market to witness any City centre preletting activity and Grade A take-up volumes up 60% year on year. In contrast Bristol saw Grade A activity fall 80% year on year and a lack of larger deals.” There was positive news in terms of speculative development with a number of schemes already under construction and a number due to start on site in 2013. Richards added: “Our requirements data is also positive.

Looking at just the top five requirements in each of the Big Six markets there is a total of 1.7m sq ft of active enquiries, with an average requirement size of around 60,000 sq ft.” Investment activity in 2012 totalled £539m, down 25% on the £824m seen in 2011. “True” prime yields moved out in 2012 to offer between 250 and 300 bps margins to central London.

Yields moved out from 6.29% at the end of 2011 to 6.36% in 2013. Simon Merry, director in JLL’s national office investment team, added: “Investment volumes were down significantly in 2012, but there is expanding market activity in the regions given its relative pricing when compared with London and the South East and other Cities worldwide.”

Significantly in 2012, overseas investors accounted for over 60% of all investment transactions and Merry said there was increasing evidence of global money targeting the regions and a strong motivation to buy. JLL expects US private equity, German funds and Israeli insurance companies to continue to be dominant forces in 2013 alongside increased interest from Asian buyers looking further afield than London, particularly from China and Thailand.

Mark Wilson, director of capital markets, Jones Lang LaSalle, said: “With prime regional office yields now offering between 250 and 300 bps margin over other locations within the UK it is anticipated that there will be considerably more UK institutional activity during 2013. “Furthermore with encouraging occupational sentiment and attractive running yields we expect demand from property/opportunity funds to be a major influence over the course of the next 12 months. Overseas investors priced out of London and the more expensive European cities are likely to find favour in good quality real estate in the regions which offers quality covenants in a favourable currency environment.”