While big office deals tend to grab the headlines, it’s the mid-sized assets of between £5 and £15 million that have been the overlooked regional investment success story of the past 24 months.

Changes to permitted development (PD), allowing buildings to be swiftly changed to residential use, have removed a surplus of older office stock from many of the UK’s regional towns and cities. At the same time there’s been a lack of speculative office development in many local markets, meaning that companies looking for space (of which there are many) have had few options to choose from.

While top spec Grade A office buildings have been able to attract high rents, there are many occupiers looking for a more affordable option. These occupiers tend to be tethered to a specific area: they are either local companies, founded in the vicinity or based there for a long time and loath to leave their roots, or have a local workforce which they do not want to risk losing by moving to a cheaper market further away from transport links or the like.

Indeed, Savills research shows that companies move an average of just 0.5 miles. With staff often being a company’s most valuable commodity, this is hardly surprising. Occupiers have therefore been seeking space in mid-range buildings, which may not be glamorous or architecturally stunning, but offer what they need in terms of location and deliver solidly on the basics in terms of fit-out. Continued take-up demand for these buildings has, in turn, become an opportunity for investors.  

The 'workhorses' of the market valued between £5 and £15 million offer good covenants: whether let to a single occupier or multi-let to several, once in, their tenants often don’t want to move for the reasons outlined above, and provide a reliable income return over three to seven years.

With assets with 10 year+ income often attracting away the big funds, local authorities, overseas buyers and institutional investors, competition is less fierce lower down the ladder, with assets trading at between 100 to 250 basis points below prime offices. But we would argue that some of these buildings show very good value due to the smaller pool of buyers who have already spotted the opportunity.

Example transactions we’ve seen in the last year fitting this description are Midgate House in Peterborough, which sold at a net initial yield (NIY) of 7.91 per cent, 1200 Thorpe Park in Leeds at a NIY of 7.5 per cent, Keats House in Leatherhead at a NIY of 8.25 per cent and Parc House and The Factory in Kingston at 6.43 per cent. In total, we’ve seen 176 transactions in this area of the market, totalling £1.93 billion, of which Savills has acted on 40 worth £476 million (representing 25 per cent of the market), over the last two years.

The investors that have already made a move into the sector are those that you could characterise as  ‘old school’ property companies happier with smaller lot sizes and a reliable income return. They’re also comforted by the fact that should a tenant vacate and on the off-chance they can’t re-let the space they can always implement a PD play as a back-up option.

With demand for regional office space continuing, and new space remaining at a premium, we’re likely to see the trend continue. They may not be the biggest or most well-known buildings in a city, but these mid-sized assets are often their overlooked stars. 

Further information

Contact Savills office investment