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News Release

London

New office development remains limited in UK’s regions

Bristol and Manchester’s Grade A office supply set to run out in 2014 according to Jones Lang LaSalle Big Six research


London, 21st February 2012 – New office development activity in the UK regions is set to remain limited this year with activity continuing to focus on refurbishment of existing stock rather than full scale developments.  Across the Big Six regional markets of Birmingham, Bristol, Edinburgh, Glasgow, Leeds and Manchester, six offices schemes started speculatively last year, four of which were underpinned by pre-lets according to new research by property consultants Jones Lang LaSalle. 

Jeremy Richards, director in Jones Lang LaSalle’s National Offices team, said: “Whilst shortages of Grade A office supply have kick started limited development activity, there is just circa 600,000 sq ft currently under construction speculatively across the Big Six.  The persistent lack of development finance, combined with the weak occupier market, continues to make developers reluctant to commence speculative development.  New construction is typically only happening only where there is a pre-let in place.  These remain rare and difficult with only five pre-lets agreed across the Big Six markets in the last 24 months.”

As a consequence Grade A office supply remains constrained with average vacancy rates of just 3.1 percent across the Big Six markets. Given the limited development activity, 2012 will see intensification of Grade A supply shortages in the majority of these markets; Jones Lang LaSalle forecasts that Grade A supply could run out in both Manchester and Bristol in 2014.

Supply side constraints will however continue to support prime rents for the best quality space. On aggregate, Jones Lang LaSalle forecasts limited growth of 2.2 per cent by the end of 2012 across the majority of regional cites; driven primarily by the Scottish markets. The Grade B market carries significantly more downside risk with supply conditions leading to more extensive rental falls.  Additional factors, including legislation, occupier preference and technology will also accelerate the obsolescence of older stock with more product expected to be allocated for change of use.

60 percent of occupier take-up last year in the Big Six markets was driven by lease events and whilst demand is forecast to remain subdued in 2012, structural lease events will continue to be a significant driver of demand.

Looking ahead, Jones Lang LaSalle anticipates intensification of several long term demand trends.  Cost pressures and technological advancements will drive the long term trend of smaller space requirements. “While new technologies will encourage flexibility and drive churn, we expect requirement sizes to fall over the longer term as occupiers seek to use their accommodation more effectively through space intensification strategies”, added Jeremy Richards.

The UK’s regional investment market was characterised by overseas influence in 2011.  Overseas investors accounted for 63 percent of the total invested last year in the six key regional markets, compared to just 24 percent in 2010.  Jones Lang LaSalle expects this trend to continue over the medium term as investors priced out of the London market seek value in the regions.  The prime UK regional office yield was unchanged at the end of 2011 at 6.00-6.25 per cent.  

Angus Minford, director in Jones Lang LaSalle’s National Investment team, commented: “Whilst we anticipate London will continue to stand out as the primary focus for investors, largely due to its continuing dominance as a global business and financial centre, this is making investor competition increasingly fierce and pricing some out of the capital.”

He concluded: “There is the potential for more overseas investors to migrate to key regional markets for core assets as they are perceived as good value. Secondary properties are likely to remain more challenging however; investors will continue to be asset specific in their selection, preferring multi-let core buildings with limited capex.”