South coast: Professions and financial services at head of office queue

Tenant demand for office space from professional and financial services occupiers is showing signs of growth across UK regional cities, according to CBRE. Despite the UK’s return to recession in the first half of the year, CBRE’s Regional Offices Marketview reveals that this improvement is due to a diminishing supply of available prime space, as well as a significant number of occupiers facing lease expiration in 2014/2015, and who are now beginning to consider alternative office accommodation as a result.

The South coast has seen one of the strongest starts in many years with a total take up in the first half of 119,978 sq ft. However, this must be tempered by the fact that almost 75% was Ageas Insurance’s acquisition of Portswood House in Chandler’s Ford. Other transactions during the first half were relatively limited and enquiries continue to be drive by near term lease expiry rather than expansion. Occupiers are therefore taking the decision to renegotiate their leases on improved terms and remain in their existing space rather than relocate.

In terms of available stock across the South, this has edged up over the first six months to 672,945 sq ft with secondhand space continuing to dominate. There remains a severe lack of debt funding to support speculative development, and as a result there are only seven grade A buildings that have more than 20,000 sq ft of available space.

The UK’s development pipeline over the next three years will deliver just 0.4 million sq ft per annum, just 20% of the annual average since 2000 of 1.8 million sq ft and there are currently no projects set for short-term completion across the M27 corridor, Southampton or Portsmouth. Looking further ahead Development Securities and Cumberland Commercial’s schemes which combined will bring in excess of 210,000 sq ft of premium office space will be predicated on pre-lets at a substantially higher level than existing rents. In order for construction of these buildings to commence, it is likely that rents would have to be in the region of £23.50 psf, a 30% increase on current levels.

James Brounger, managing director, CBRE South Central, said: “Whilst the market remains constrained by the state of the economy there is considerable opportunity for occupiers to improve their position but, as good quality space dries up, we anticipate landlords will take a stronger stance.

“In common with some of our other regional offices, Southampton benefited from a sizeable transaction driven principally by pent-up occupier demand for the best quality space. We are aware of a number of other major corporates who face lease expiries in the next two years and these requirements will alleviate the pressures felt as the UK moves out of recession.”

In terms of prime regional office investment, initial yields have remained stable at 7% but there is an increasing geographical differentiation between the initial yields being paid according to location.

Rob Silvester, head of regional capital markets, CBRE, said: “As prime regional office yields continue to drift, we are seeing the start of renewed interest from UK institutions that had their interest piqued by initial yields being at historically high levels.”

Resources: CBRE website