London will surge ahead with rental growth this year while the rest of the regions will do no better than stabilise.
According to Drivers Jonas Deloitte’s UK Key Cities Office Trends 2011, the capital will continue to show healthy demand and positive rental growth during 2011, while the regions will see limited scope for rental increases.
Last year London outperformed with rental growth of 25 per cent in the City and 21 per cent in the West End, accompanied by record take-up levels. Regional cities, however, lagged behind with all but Manchester recording falling rents during 2010. Prime rents in Birmingham fell two per cent during the year. At the year end, typical rents for Grade A office space were £27.50 per sq ft but ranged from as low as £22 per sq ft.
Philippa Pickavance, head of agency at Drivers Jonas Deloitte in Birmingham, said: “Conditions will remain tough outside London during 2011. 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 a slow recovery in some sectors as supply levels reduce. This year will be all about gearing up for the future rental growth in 2012 and beyond.”
Take-up in Birmingham ended the year at 669,000 sq ft, slightly lower than the ten-year average but an increase of 1.7 per cent on 2009. Availability of immediately available Grade A space now sits at around 750,000 sq ft.
In the investment market, the total value of office transactions in the UK rose by 30 per cent year-on-year with over half of the £10 billion transacted coming from overseas investors. Birmingham saw its largest investment deal on record with the £190 million sale of the Brindleyplace portfolio, while 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. Edinburgh was the only city not to see an increase in investment volumes, with levels falling by 42 per cent.
Prime yields in Birmingham at the end of 2010 stood at six per cent – a softening of 50 basis points from January 2009. However, according to Drivers Jonas Deloitte they are not expected to change significantly during 2011 and should remain around the same level.
Ms Pickavance added: “Investment levels across the UK are likely to fall after a strong performance in 2010 but if the regional cities maintain their recovery investors will be increasingly looking beyond the capital.
“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 that will continue to be an area of concern for those wishing to invest. Property companies and cash-rich private investors are likely to be attracted to secondary assets by relatively high yields and opportunities to add value.”