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News Release

London

Q3 occupier activity increased in UK regional office markets

Although future demand forecast is poor according to Jones Lang LaSalle


London, 8th November 2010 - According to Jones Lang LaSalle, total office occupier activity in Quarter 3 (Q3) 2010 increased across the six key UK markets outside London*, compared with both Q2 2010 and Q3 2009, although this was driven primarily by robust volumes in West London and Manchester with activity remaining more muted in other markets.  Given the anticipated public sector job losses and knock-on impact on the private sector, future demand will continue to be driven by structural demand and portfolio churn.  With such a poor demand outlook it remains to be seen whether any one business sector will stand out and help drive recovery over the next 12 months. However, Jones Lang LaSalle forecast’s that Edinburgh will be the only centre to see an increase in annual office take-up, with volumes anticipated to remain at 2010 levels in other key markets monitored.

Prime rents were relatively stable in Q3, although increases of 1.8% and 1.9% were recorded in Birmingham and Glasgow respectively, albeit they were driven by the shortage of Grade A supply rather than any recovery in demand.  According to Jones Lang LaSalle’s Q3 Office Clock, which compares the relative position of markets in their rental cycle, rents have bottomed out in Glasgow and Manchester with rental growth being seen in West London.  In the secondary market there remains more flexibility as landlords continue to be extremely competitive, in order to secure tenants, and further softening of Grade B rental values is anticipated in most markets.

 
James Finnis, head of Jones Lang LaSalle’s National Offices team, England, said: "Over the last 18 months, we have seen tenants hunt quick wins to cut costs. In Q3 we began to see signs of a shift away from this defensive position and instead an increasing focus on cost avoidance and selective opportunism.  We anticipate that this type of opportunistic activity will persist in the UK markets and will be the primary driver of occupier demand into the medium term although it is likely that there will not be a stand out business sector to drive recovery in 2011."

Cameron Stott, Director, Jones Lang LaSalle Edinburgh Agency & Development team, added: “Activity in Edinburgh has improved on the previous year with the main driver being the financial sector with occupiers being driven by a combination of expansion and structural demand. Glasgow continues to perform well defying the economic outlook for the UK with there being a real prospect of a shortage of supply in 2011.”

With the exception of Birmingham, where a significant office portfolio deal completed, investment volumes across the UK’s regional markets fell in comparison to Q2.  Given the weak outlook for the UK occupier market, focus remains on core and core plus assets and it was a lack of availability of this product that was in part constraining activity. While investor sentiment remains positive Jones Lang LaSalle’s quarterly measure has recorded a second consecutive quarter of sentiment decrease. This is partially due to the perception that prices have risen too sharply against the weak economic and occupational backdrop but also fuelled by concerns linked to sovereign debt, the government austerity programme and the pricing of other asset classes.

Prime yields were stable over the quarter at 6.00% in the major UK centres and 6.50% in the Western Corridor, although in Glasgow the sale of The Equinox Building reflected a net initial yield of 5.75%, illustrating the attractiveness of properties with long term income. The halt in yield compression has resulted in a slowdown in capital value growth. Over the three months to September the IPD monthly digest recorded growth of just 0.67% for all UK offices, compared with growth of 13.29% over the previous 12 months to September.

“With stable yields forecast, any capital value growth will have to be driven by rental growth”, added Angus Minford, Director, Capital Markets at JLL, England.  “Although our forecasts for rental growth are positive they are relatively weak and this will keep capital values fairly flat going forward. Given stable capital values, expected total returns will be driven predominantly by income return, emphasising the importance of asset management.”

 
Notes to Editors:
*The six key UK markets outside London monitored by Jones Lang LaSalle are: Birmingham, Leeds, Manchester, the Western Corridor, Edinburgh and Glasgow. 

Jones Lang LaSalle’s latest National Voice - Office Market Conditions across the UK research report (for locations outside of London) examines Quarter 3 2010 activity and provides a forward looking view on the office leasing and investment markets in Birmingham, Leeds, Manchester, the Western Corridor, Edinburgh and Glasgow.