Tightening of office supply could stimulate regional investment demand19th April 2013

A constrained supply of offices is one of a number of factors that could help stimulate regional investment demand according to a new report by Deloitte Real Estate.

The UK Key Cities publication explores the trend that regional office supply is tightening and therefore putting upward pressure on rental growth. Accordingly, this could help to stimulate regional investment demand, attracting investors seeking rental performance and higher returns than currently available on prime assets in the capital.

The report shows that regional cities recognise the need to stand apart from competing locations and are attempting to do so through large-scale infrastructure projects.

Adam Robson, assistant director 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.

“This appetite for stock in Manchester has been evident. City centre take-up for the first quarter reached circa 272,000 sq. ft. Key deals include Traveljigsaw’s move into 63,000 sq. ft at Sunlight House and WorldPay’s relocation to 3 Hardman Square in Spinningfields. Attracting global players to the city and encouraging companies to locate out of London is testament to Manchester’s international appeal.”

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.

Manchester’s lack of Grade A completions in core areas will drive rents with incentives reaching a record low. Mr Robson continued: “Overall, demand for Grade A space has been relatively resilient which, combined with a constrained supply, has led to a 3% increase in prime rents. Occupiers will have less room to negotiate if they want a city centre location this year.”