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July 16, 2018

As office supply struggles to keep pace with demand across the UK, investors are seeing opportunities outside London.

Office space in many of the UK’s big regional cities is in line for above-average rental growth in the coming years as demand and supply remain out of sync.

Despite concerns around potential fall-out from Brexit, strong demand for high quality space is meeting low supply levels across the so-called ‘Big 6’ markets of Birmingham, Bristol, Edinburgh, Glasgow, Leeds and Manchester.

Three cities in particular – Edinburgh, Birmingham and Manchester – are seeing some of the strongest rental growth forecasts in Europe, according to JLL’s Hotspots 2018 report.

“UK cities are experiencing a substantial lack of supply,” says Barrie David, JLL UK Research Director. “Occupiers are needing to move quite quickly to secure any space that does become available. Low supply and high demand is providing opportunities for investors who have gone beyond London.”

Supply concerns

The lack of supply is being driven by a lack of new development finance, competition for space from other sectors. At local level, the introduction of directly-elected city mayors has reshaped decision-making in Manchester and Birmingham.

In the latter, a 385,000 square-foot development in Birmingham by construction group Ballymore and investor M&G Real Estate is the largest speculative project in all the UK´s regional office markets. Construction of the Three Snow Hill scheme is due to complete in June 2019. However, construction finance from cautious banks remains restricted, resulting in little speculative development overall.

And, it’s not just office investors that are vying for opportunity in the UK’s big cities, says David, with “other sectors, such as residential and student housing, also in the mix.”

He cites Edinburgh, with its strong tourism numbers, as an example of where the hotel sector is a major player.

However, pressure is most noticeable in Bristol, where vacancy for Grade A office space is 0.5 percent. The cities – both below the Big 6 average vacancy in the UK of 1.7 percent – last year recorded respective annual rental growth of 3.2 percent and 14 percent.

Government influence

A key driver of office letting across UK regional cities in recent years has been the government´s management of its own portfolio. Set up in 2010 as the Government Property Unit (GPU), the division is tasked with consolidating space from third-tier towns into larger regional, offices.

“Large scale consolidation of the UK government´s portfolio, such as local tax offices, has had a positive impact, boosting take-up figures in the Big 6 markets,” says David.

GPU last year signed a lease in Leeds for 380,000 square feet of office space at Wellington Campus, owned by Hermes Investment Management and the Canada Pension Plan Investment Board. The letting was the biggest ever pre-let deal in Leeds.

Government – at a local level – has also played a role in the attraction of UK regional cities, with devolved powers speeding up decision-making in the likes of Birmingham and Manchester, where flexible space operator WeWork opened its second site last year.

“Both cities are exercising their devolved powers over transport, housing and planning, which is benefitting companies based there and attracting others,” says David. “Manchester has seen four consecutive years of take up of over one million square feet. That outpaces all other regional UK cities.”

However, Birmingham is chasing Manchester down due to its infrastructure improvements with significant improvements to the main station, tram line and, longer-term, the HS2 high-speed rail link, due for completion by 2025 all already positively influencing sentiment in the city.

Going where the talent is

A common theme across the Big 6, says David, is occupiers´ desire to find space where there is access to talent – and investors are taking note.

“Bristol – a smaller market in terms of office stock than Birmingham or Manchester – attracts occupiers who are well-aware of the city´s strong academic credentials and talent pipeline,” he says. With its strong tech reputation, Hewlett Packard, EE and mobile tech firm Somo are among the city’s 50 micro-electronics and silicon design companies. It’s also home to The Bristol Robotics Laboratory, an academic centre for robotics research.

A booming tech sector is also fueling demand for space and driving up rents in Edinburgh. New developments such as Haymarket, one of Scotland’s biggest commercial development sites recently acquired by M&G Real Estate, as well as plans by Parabola for a new ‘urban quarter’ in Edinburgh Park, will help to boost supply.

“If we can improve the provision of new build offices, we can start releasing some of the older office stock which is then protected for its existing use and available for younger growing companies to expand into,” says Cameron Stott, Director, Office Agency, JLL.

Even with new supply, all six regional UK markets offer substantial potential for rental growth in the longer-term, says David.

“Steady demand is really thanks to the fact that these cities – in their own right – are strong economies.”

Click to read about why central London offices are ripe for pre-let.

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Barrie David

JLL UK Research Director

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