DTZ

30 October, 2009

UK regional office take-up increased 150% in Q3 (July – September 2009), according to DTZ Research’s latest UK regional office market updates covering 9 cities in the UK.

Birmingham, Glasgow, Leeds, Manchester, Newcastle and Nottingham drove the increased take up.

• In Birmingham, transactions volumes were up significantly in Q3, augmented by a 196,000 sq ft scheme that the City Council has committed to build on the fringe of the city centre.
• In Glasgow, the volume of recorded enquiries improved significantly in Q3, with current requirements boosted by a spike in demand from a number of organisations with approaching lease expiries or break options
• In Leeds, take-up doubled to just under 100,000 sq ft in Q3, driven by two above average size deals from Lowell Group and Trillium (Prime) Property GP Limited – the latter being an inward migration to grade A space. Grade A office take-up more than trebled in Q3
• In Manchester, take-up has remained relatively resilient in 2009. While the volume is 35% below the five year average, this is accounted for almost entirely by a shortfall in absorption of secondary stock. Grade A take-up is broadly in line with the five year average, following various upgrades to prime space
• In Newcastle, the quality of requirements has improved, with more of a genuine sense that they will actually lead to a deal. Take-up increased significantly in Q3 and consisted almost entirely of grade A stock
• In Nottingham, take-up increased very sharply to almost 290,000 sq ft in Q3, skewed by the sale of Loxley House (214,000 sq ft) to the City Council. This is the largest quarterly volume in more than 11 years
• In Bristol, the focus of demand shifted towards the city centre in Q3, given the more competitive deals on offer combined with the advantage of superior transport accessibility and other amenities. Overall Q3 leasing activity was broadly in line with Q2, though the proportion of grade A space increased. Legal firms featured significantly, the biggest deal being 25,000 sq ft from Lyon Davidson on Queen’s Square
• In Cardiff, transaction activity was low over the summer and, in contrast to several other regional centres, take-up fell back in Q3, with no large deals to boost the figures
• In Edinburgh, no one sector was particularly dominant in Q3, though local firms continued to be very prevalent. Edinburgh has no grant aid and tends to be viewed as too expensive in terms of rents and staffing for footloose UK requirements. Activity was generally weak over the summer, and the absence of any large transactions that have typically boosted take-up figures in the past meant that Q3 take-up fell back

Martin Davis, Head of UK Markets Research said: “Increased demand across the UK continued to be driven mainly by lease events, while transaction volume was also boosted by the completion of a significant number of long-standing negotiations sealed by increased incentives and discounts. Occupiers thus maintain a commanding position and as a result, are successfully securing higher quality accommodation in city centres that may previously have been outside their price range. In many cases, moves have been made cost neutral to tenants by the use of incentives.

“Whilst Q3 was encouraging across the UK, looking forward, the level of current requirements and volume of space under offer mean Q4 take-up is expected to fall back across most markets. Overall, 2009 take-up is forecast to be down around a third compared to 2008; the lowest level we’ve seen since 2003.”

The UK regional development pipeline is much reduced. Completions expected 2010 to 2012 are now only 15% of the total that was expected in mid 2008. Nevertheless, availability is expected to rise over the short term as more unused space is returned to the market. An extended period of weakness in occupier markets will result in a decline in net effective rents over 2009/10 in excess of 30% in some locations.

Whilst regional investment markets continue to be characterised by an extreme shortage of suitable investment product, investor sentiment continued to improve in Q3. Competitive bidding picked up in some markets, leading to a tightening of prime yields in several locations, notably Leeds and Manchester. With a growing amount of equity targeting the market, there are tentative signs that some (equity-backed) investors are willing to move up the risk curve, for example, by targeting properties with a short lease or poor covenant, in order to secure assets and obtain a substantial risk premium.