Overseas investors and changes in flexible workspace activity dominate the ‘Big Nine’ markets

$Release_Title.getData() 29 Jul 2019

Avison Young releases The Big Nine quarterly update of regional office activity for Q2 2019.

Take-up has been strong across the Big Nine regional office markets during Q2, with activity heavily skewed towards larger deals, city centre markets and the ‘modern’ sectors of flexible workspace and TMT. Conversely smaller deals, the out-of-town markets and traditional sectors such as financial, professional and business services have underperformed, according to Avison Young’s The Big Nine quarterly update.

Figures from the report, which covers Birmingham, Bristol, Cardiff, Edinburgh, Glasgow, Leeds, Liverpool, Manchester, Newcastle show office investment volumes during Q2 amounted to £575 million, 5% up on the ten-year quarterly average.

In the occupational market, Q2 activity was 10% up on the long-term average, bringing the half year total to 4.3 million sq ft (6% up on the average). Charles Toogood, Avison Young’s Principal and Managing Director, National Offices, comments: “Activity in Q2 was led by a number of large city centre deals, combined with record levels of activity in the flexible workspace sector. Q2 alone has seen over 600,000 sq ft of flexible workspace deals, which is already similar to the annual totals in the previous two years.”

The flexible workspace deals included the two largest ever in the sector across the regional markets, 120,000 sq ft to Spaces at 125 Deansgate in Manchester and 92,000 sq ft to WeWork in Birmingham. In addition, there were two further lettings to WeWork in Birmingham and the sector accounted for over a third of city centre take-up in Bristol, Edinburgh, Liverpool and Manchester.

Charles continues: “Elsewhere the largest deal of the quarter was an exceptional 203,000 sq ft to software company Sage Plc at Cobalt Business Park, Newcastle, while most out-of-town markets underperformed. In the city centres the largest deal was to the owner of Sky Betting & Gaming - Stars Group - who pre-leased 135,000 sq ft at 4 Wellington Place in Leeds.

“These headline deals mean that flexible workspace, TMT and consumer services accounted for almost 80% of activity over 5,000 sq ft. In stark contrast there was very little activity by the public sector, finance and particularly professional services sectors.”

“In contrast to Q1, the amount of take-up in deals greater than 50,000 sq ft was more than twice the long-term average. Conversely the level of activity in deals below 25,000 sq ft was down by 20%. This explains the level of caution that agents are reporting in some markets as smaller deals are taking time to progress.”

In Q2, headline rents continue on an upward trajectory and have reached a new average high of £30.56 per sq ft across the Big Nine cities. With an average rent-free period of 19.3 months on a ten-year term, equating to a net effective rent of £26.41 per sq ft, an increase of 4.8% over the past 12 months.

Development pipeline in Q2 shows 5.4 million sq ft of offices under construction across the Big Nine markets, with Birmingham, Manchester and Glasgow each seeing more than 1 million sq ft of development. Half of the space under construction is already pre-let, and of the speculative space available, approximately two-thirds is in just two markets - Manchester and Birmingham. The substantial speculative developments completing across the ‘Big Nine’ cities this year include Snowhill (370,000 sq ft) and 2 Chamberlain Square (167,000 sq ft) in Birmingham; Landmark Oxford Road (160,000 sq ft) in Manchester and Lumen (106,000 sq ft) in Newcastle.

In investment, overseas investors continue to drive the market, accounting for 85% of transactions during Q2. Mark Frampton, Avison Young’s Principal, Investment, says: “UK real estate remains a ‘safe haven’ asset and overseas investors continue to benefit from the materially weakened currency. Conversely there has been a notable slowdown in activity from the UK institutions.”

Activity was heavily skewed towards Birmingham and Edinburgh this quarter, totaling circa £200 million each (75% of the total). The UK’s largest office transaction outside London so far this year was the sale of Priory Court and Lewis Building in Birmingham by Legal & General Property to Gulf Islamic Investments, which transacted for £139 million. “The deal was agreed at the end of last year, although uncertainty surrounding Brexit delayed the transaction. It does however demonstrate how investors are focusing on prime assets and security of income, “Mark adds.

In Edinburgh the mixed use 4-8 St Andrew Square was sold to KanAm Grundinvest Fonds for £120m and the Leonardo Innovation Hub at Crewe Toll was bought by South Korean investors for £100m.

Mark concludes: “With the Brexit deadline approaching, investment volumes are expected to be down next quarter. This is similar to the pattern observed in Q1, however, the limited supply of prime investment opportunities is also suppressing activity.

“Prime yields across the Big Nine have softened in a number of cities this quarter. This is based more on market sentiment than real evidence but if the uncertainty dissipates, it is likely that transaction volumes will resume, and yields will harden again.”

You can download the full report here.

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