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Commercial property will continue to focus on value and improved services rather than price in 2014 31st January 2014

Occupier demand will underpin take-up of commercial property across the regions in 2014

The outlook for commercial property across the regions is looking more positive thanks to eonomic growth, which is forecast to increase by 2.8 per cent in 2014, and 3 per cent over the medium term, while employment is forecast to increase by 400,000 over the next two years. Job gains will be underpinned by business services, TMT and retail, offsetting the ongoing contraction of the public sector.

These were some of the main findings highlighted in commercial property specialists DTZ's 2014 Annual Outlook report. 

As a result of a predicted improved UK macro outlook, occupier sentiment and demand for commercial property is generally strengthening with take-up growing across the regions.

However, availability, particularly for Grade A office and industrial space, is falling rapidly. The report estimates that there is only 1.6 years of Grade A office space left based on current take-up rates. The retail market is also expected to see vacancy rates moderate from current high levels.

Investor appetite for commercial property assets is increasing and volumes have risen markedly. The record yield gap between London and the regions, and between prime and secondary property, is encouraging investors to move up the risk curve. However, the window of opportunity is closing as the yield gap is forecast to narrow and regional markets will become less undervalued.

Richard Yorke, UK Head of Research at DTZ and co-author of the report said: “Based on its relative attractiveness, investors’ appetite for commercial real estate is very strong. This is further helped by a normalisation of the lending markets. But, investors should take advantage of current pricing quickly before interest rates rise. At the same time, prime opportunities have become less attractive. Consequently, investors need to consider secondary assets and locations more closely, which are still attractively priced. Investors need to be bold and move quickly to take advantage of this limited time opportunity.”

The growing shortage of grade A office space, combined with the regional development pipeline at an all time low, means investors are now encouraged to acquire assets for development and refurbishment.

The bigger cities are best placed to respond to potential new demand. Birmingham, Glasgow, Edinburgh and Leeds are strongest in terms of development as a proportion of long term deliveries. The dearth of new supply and a wave of leasing events mean that prime rents are increasing and set for further growth. The cities which are likely to see relatively rapid increases are Edinburgh, Leeds and Manchester. Incentives are also likely to erode in markets such as Birmingham.

David Tonks, Senior Director and Head of DTZ’s Office Agency team in Birmingham said: “It is increasingly the case that an occupier’s comparison of value available in the market involves an assessment of the building specification and services provided by the landlord in addition to the headline financial terms. As the supply and demand balance continues to shift we will see the cost of good quality space increase during 2014 and it is already evident that incentives offered to occupiers are less generous than they were 12 months ago and pressure on headline rents is growing.

“There are, however, also signs of landlords competing for occupiers by providing improved services to their tenants. The trend for an improved level of service is most evident in the market for secondary accommodation that accounts for almost 50% of annual take-up within the Central Birmingham market. The more successful buildings are increasingly offering additional services that provide increased convenience for occupiers through a central concierge service or increased efficiency in use through shared meeting/catering facilities for example. Larger occupiers are also analysing their occupancy rates and factoring this into the scale of their requirement having allowed for building specification and quantifiable expansion plans over the short to medium-term. The keen focus upon value rather than price looks certain to continue.”

DTZ Research also revealed that the outlook for the industrial market is positive with increased manufacturing activity and export orders leading to strong take-up of Grade A space. However, as with the offices market, a lack of available Grade A space (in most regions less than 10 per cent of total availability) the options for occupiers seeking existing grade A stock are severely limited. Meanwhile, retail spending will continue to increase with some high streets seeing falling vacancy rates in 2014.

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