Moving into the final quarter of the year, it can never be certain in the commercial property market whether we’ll see a quiet end to the busy year or a swelling of spending from investors who see positives from the year to date and want to capitalise.
Looking at quarter four of 2014, however, Savills latest Commercial Market in Minutes report has shown that it may well be the latter situation that we witness, with this year having proved very successful for the regional commercial market, and prospects for the market looking strong headed into 2015 and beyond.
UK institutions head to the regions
UK institutional investors are now starting to realise that there is potential for real yield growth in the regions outside London, according to the Savills report. They are also looking to capture the beginnings of the regional leasing market recover.
This has been shown by the fact that there are now more and more UK institutions in the regional commercial property sector. Savills said that as recently as 2012, these accounted for just a third of spending in this sector, but as of 2014 this has seen a substantial climb, and now sits as high as 43 per cent.
The latest property market report also showed that the majority of the commercial sector now exists outside London. Just last year, Savills reported that only 34 per cent of the sector was in the regions. However, investment over the past 12 months of £18.7 billion has helped to see this figure rise to some 51 per cent.
This change has largely been driven by the fact that confidence in the regional office sector has started to soar, driven by the rising number of companies relocating to northern cities, following in the footsteps of the BBC and its move to Manchester.
Low development in regions
One of the other key issues that Savills addressed in its latest report surrounded the supply in the office market, and how this can help drive yields higher for investors. Development is at a low level at the moment, and when this is paired with demand rising and higher occupancy rates, it has sent yields higher.
This is a particular issue in the regions, where demand has grown far faster than in London. Across the nation, take-up rates for this sort of space have risen by 22 per cent year on year. However, some regions are seeing rises at an even faster rate. According to Savills, Manchester has seen take-up rates climb by 38 per cent, while Cardiff has posted an increase of 69 per cent in the same time period.
As a result, six of the eight regional Savills offices have reported falls in supply over the last few months, with Leeds, Manchester and Cardiff being the three areas where this has become the biggest issue. What it means for investors, however, is that competition for prime spaces will rise, helping to push rents and yields ever higher. Leeds, Manchester, Bristol and Birmingham are all expected to see office rental growth of over 3% p.a. to 2018.
The regional market should become an even stronger investment stronghold for those UK institutions that have been making them a priority. The majority, according to Savills, have reported a marked shortfall between what they had expected to spend and what has actually been deployed in the year to date. This means that the next three months should see an upturn in activity.