UK commercial property investors shift focus to the regions

Investors in the commercial office market are increasingly being drawn towards the UK regions, according to a new report by Deloitte Real Estate. The UK Key Cities publication explores the trend that regional offices are emerging as a focus for savvy investors seeking higher returns. At the same time, individual cities are recognising the need to stand apart from competing locations and bridge the gap between themselves and London. These cities are being bolstered by factors such as improved connectivity through large planned infrastructure projects, devolution of power, and investment into the retail and leisure markets.

Anthony Duggan, head of research at Deloitte Real Estate, said: “Investors are increasingly being priced out of the London real estate market and are now seeking opportunities outside the capital. We’ve seen a large number of new entrants to the UK investment market cutting their teeth in London, and we now expect to see them beginning to pursue opportunities in the regions where there is the potential for higher income yields.”

Market conditions and future changes in key cities across the UK are studied in the report, which suggests that occupational demand for offices will be mainly from the professional and administrative sectors with active demand from the legal sectors in the regions. Employment growth is expected to be slow during this year but return to stronger levels of growth in future years.

In the capital, office rents in the City of London are not expected to change yet yields will harden 25 basis points, driven by the strong overseas demand and TMT and insurance occupiers are dominating the demand in the City. West End rents on the other hand are expected to increase 10 per cent this year with yields also hardening by 25 basis points.

In the regions, rental growth is not expected in Leeds and Birmingham but Manchester’s lack of Grade A completions in core areas will drive rents up by three per cent with incentives reaching a record low. Expect office refurbishments rather than new construction in Leeds, and in Birmingham a high number of offices changing use, such as hotels and residential. North of the border in Scotland, current lack of development and low stocks of Grade A space in the office market will push rental growth; Edinburgh forecasted a seven per cent increase and Glasgow five per cent. Glasgow is also the first city in the study to see new development activity commencing.

The report explores the new powers gained by cities under the City Deals scheme. Liverpool, Leeds, Bristol, Newcastle and Birmingham are among the group of cities that have agreed a form of devolution in exchange for an offer to improve outcomes and efficiency. The agreement with the government allows a city to drive its own economic strategy and make decisions on infrastructure and investment. Newcastle for example is in the process of initiating a £92m investment programme which it hopes will lead to over 13,000 jobs. Such is the expected success that 20 further deals have been confirmed for mid-sized cities.

Duggan concludes: “We expect to see increasing activity in the UK’s regional markets during 2013 with more, albeit still low, leasing deals and positive rental growth in some locations. Importantly, there are strong signals that there will be further investor interest in the regional office markets this year with both domestic and overseas investors looking outside London for their returns.

“It is encouraging to see the momentum that a number of these key regional centres have in terms of infrastructure and governance and we believe that this will provide a level of confidence to investors in the future performance of these local real estate markets.”