UK regions news 21st May 2014

The UK’s regional occupier markets made a positive start to 2014, reflecting a revival in occupier sentiment during the past 12 months, according the latest research by Knight Frank. In Leeds, on the back of improving sentiment, occupier activity in the office market rose 30% in terms of the number of deals, compared with the first quarter of 2013.

Elizabeth Ridler, partner specialising in office leasing at Knight Frank’s Leeds office, added: “While there is a shortage of Grade A office space, there is still a steady demand for good quality refurbishments, such as the newly completed Minerva House, and the forthcoming ones at 9 Bond Court, and East Parade, all of which provide floorplates of between 5,000-6,500 sq ft which have dominated take-up over the last 10 years.

“The city has a very limited supply of available Grade A office space, caused by a lack of speculative development. This was largely responsible for the 40 per cent fall in the amount of floorspace taken up in Q1, which must also be seen in the context of 2013’s record level of leasing activity. “Rents will come under upward pressure in the coming months, with Knight Frank forecasting that the present headline level of £25 per sq ft will increase to £26 per sq ft by the year-end and £26.50 by the end of 2015,” she said. Additionally, incentive packages have begun to harden, with landlords offering 9-12 months rent free on a five-year lease where they were previously offering 18-24 months rent free at the start of 2013. Ridler added:

“Currently, there is only one building in the prime core (No. 1 Whitehall Riverside) which is able to accommodate an immediate Grade A requirement for 35,000 sq ft. However, several major office developments keen to capitalise on the shortage of space, as well as a number of important lease expiries in the city, have recently received planning consent. “This includes buildings 5 & 6 at MEPC’s Wellington Place project, covering 105,000 sq ft and 144,000 sq ft respectively. Additionally, Roydhouse Properties has received consent for its Central Square scheme, which will include c.200,000 sq ft of office space and is due to complete by mid-2016.

“2014 will see the supply of Grade A stock continuing to diminish. The increasing number of conversions to student residential housing, a market that continues to expand in Leeds, has begun to impact on Grade B stock. While several schemes received planning permission in 2013, none are expected to come on site in the first half of this year.” In the investment market, total volumes outside London and the South East reached a healthy £735m in Q1, 28% above the five-year quarterly average, albeit 35% down on Q4 2013’s impressive total. Despite very strong demand for regional offices among the UK Funds, volumes are being constrained by a lack of stock, as landlords opt to hold rather than sell.

Henrie Westlake, Knight Frank’s investment specialist based in Leeds, said: “While the rate of yield compression is expected to ease, it is likely to constitute the main driver of investment performance in 2014. Moving forward, however, we expect performance to be driven more on the income side, as the recovery in the occupier markets accelerates and rental growth becomes more widespread.”