– London outperformed in 2010 with rental growth of 25 per cent in the City and 21 per cent in the West End accompanied by record take-up levels;
– The future for London continues to be positive with further rental growth in the City forecast for 2011 and further hardening of yields in the West End;
– Regional cities have lagged behind with all but Manchester recording falling rents during 2010, but no further rental declines are forecast for any of the regional cities covered;
– Four out of the five key regional cities recorded take-up levels increasing year on year in 2010;
– There is no speculative construction in any of the cities outside of London enabling the oversupply of Grade A space to be absorbed; and
– 2011 will be a platform for rental growth in the regional office markets in 2012 and beyond.
Anthony Duggan, head of Research at Drivers Jonas Deloitte, said: “Conditions will remain tough outside London during this year. Birmingham, Leeds, Edinburgh and Glasgow saw rents decline in 2010, albeit at the beginning of the year, with Manchester being the only city with stable rents for the whole year. However, positively, four of the key regional centres saw a greater amount of leasing activity year-on-year in 2010, and the majority saw availability levels decline. There continues to be surplus available office space in all of the Key Cities, but with practically no development activity across the UK we expect 2011 to see the recovery continue as supply levels reduce. 2011 will be all about gearing up for the future rental growth in 2012 and beyond.”
The report reinforces previous predictions that London continues to lead the occupational recovery with rental growth (25 per cent in the City and 21 per cent in the West End) and the City experienced its highest take-up level for 10 years, boosted by two large pre-letting deals (UBS and Bloomberg). The West End bounced back from a record low to see take-up rise by 14 per cent year-on-year. Duggan added: “We expect to see further rental growth in the City driven by strong demand for the limited prime Grade A stock and the lack of any immediate supply. The surplus Grade A space from the development boom is diminishing and development schemes mothballed have now been re-ignited with speculative construction imminent – the City will see its first speculative starts for 16 months during the first half of 2011, and the West End has a number of large schemes ready to go.”
Yields hardened during 2010 with London’s West End again proving most in demand with the greatest yield shift over the last 12 months, hardening by 75 basis points (bps) to four per cent. Edinburgh and Leeds currently have the highest prime yield of the Key Cities at 6.5 per cent, although Leeds saw a shift downwards of 50 bps during the year, whilst Edinburgh hardened just 15 bps.
Howard Richards, head of Investment, said: “Investors will continue focusing on income quality and cash flow strength during 2011 regardless of the location in which they are investing. We could see more banks forcing sales during 2011 which will bring a variety of stock to the market. However it will be the availability of finance which will continue to be an area of concern for those wishing to invest. Investment levels across the UK are likely to fall after a strong performance in 2010, but prime commercial property in London will continue to attract investors, and as the regional cities maintain their recovery investors will be increasingly looking beyond the capital.”
For the second year running the total value of office investment transactions in the UK rose, up by 30 per cent year-on-year with over half of the £10 billion transacted coming from overseas investors. Both the City and West End saw investment transaction levels increase and for the first time in over 10 years the West End recorded a higher total value than the City. Outside London, Edinburgh was the only city not to see an increase in investment volumes with levels falling by 42 per cent. Birmingham saw its largest investment deal on record – the £190 million sale of the Brindleyplace portfolio – and Glasgow saw one of the biggest investment year-on-year changes with £310 million completed investment transactions, more than three times the level during 2009.
The report plots regional and capital rents over 20 years as well as key occupational deals. It details availability, take-up, tenant demand and investment transactions for 2010 along with a 2011 outlook for prime rents and prime yields. New to the Key Cities series are snapshots for Bristol, Cambridge, Cardiff, Liverpool, Newcastle and Reading
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