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Only 1.6 years of Grade A office space remaining19th February 2014

Only 1.6 years of Grade A office space remainingThe outlook for commercial property across the regions is looking considerably stronger according to DTZ's 2014 Annual Outlook report, released today.

The report revealed that economic growth in the regions is predicted 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.

As a result, occupier sentiment and demand for commercial property is generally improving and take-up is 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 becoming 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 dearth of new supply and a wave of leasing events mean that prime rents are increasing and set for further growth. The cities that are likely to see relatively rapid increases are Edinburgh, Leeds and Manchester.

Nick Allan, Senior Director in DTZ’s Bristol investment team said: “The turnaround in investment market has been dramatic, especially over the past 12 months. This has been driven by the huge weight of money seeking exposure to UK investment markets from domestic investors and, more significantly, a wide range of international investors. The UK is a core commercial property market, and one of the most robust in the world, but investors are also attracted to the encouraging signs of improvement within the UK economy ahead of other international markets and economies.

“The pricing pressure within London and the South East of England has forced investors towards the core six regional UK centres, including Bristol where the recovery is anticipated to be strongest and where assets are currently undervalued. There are now excellent opportunities for strong returns from the South West markets with genuine rental growth and yield compression, combined with an improving environment for asset management.

“A number of recent deals have demonstrated the speed at which the market has corrected, including the acquisition of Portwall Place for £51.5m (6.91 per cent) by the World’s largest investment manager, BlackRock and Aprirose acquisition on behalf of South American clients of Parkgate, Aztec West for £17.8m (6.98 per cent).” 

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