Investment volumes in the Greater London & South East and regional office market reached £5.40bn at the end of 2020, which is 19% and 25% below the 2019 total and the long-term average. Investor sentiment has been gradually improving throughout the Covid-19 pandemic, which was evident in Q4 2020, where volumes totalled £1.84bn, which was the highest quarterly total in 2020 and a 53% increase on the total recorded in Q3 2020.

The prime regional office yield has remained at 5.00% since April 2020 in response to the investor caution in the market arising from the first lockdown. There have, though, been yields recorded below this threshold for assets that are single-let with over ten years of income. The demand for secondary assets has been limited, with the yield spread over 200 basis points in certain markets.

The appetite from investors to increase their exposure to the life science sector has been already been notable in 2021, and it's expected that this will continue throughout the year. This demand has been primarily concentrated in markets where there are existing large life science clusters such as Oxford and Cambridge, which has led to downward pressure on yields in those markets. The supply of laboratory space is exceptionally constrained across the UK, which will provide rental growth opportunities – this is notable in Oxford and Cambridge, with the vacancy rate being 4% and 0% respectively.

Supply levels remain low when compared to historical averages

The initial impact of the Covid-19 pandemic on the regional office market has not resulted in a surge of supply flooding the market. This is reflected in the chart below, where in five of the regional markets that Savills track, the end-year 2020 supply levels are below the five-year average. The supply constraints are notable in Bristol and Glasgow, with only approximately six months of Grade A supply available assuming the five-year average take-up.

Manchester is the only market that has experienced a significant increase in supply. This can be partly attributed to strong development activity in the city centre, with available Grade A supply more than doubling from the end-2019 total.

Top headline rents have grown in the regional office market, with five of the 'Big Six' office markets in 2020 seeing top rents increase. The most notable growth was in Birmingham and Leeds, where prime rents increased by 7.2% and 6.7% respectively. Incentives have, though, moved out in response to the Covid-19 pandemic.

The development pipeline continues to remain limited across the regional office market with 2.5m sq ft of available space under construction, which equates to only five months of take-up in an average year. Furthermore, 46% of the overall development pipeline has already been pre-let, highlighting the demand for the best quality space.

Supply has been on a general downward trend in the market, with end-2020 supply 35% below 2009 levels. This has been primarily caused by limited development activity and conversion of poor-quality office space to alternative uses under permitted development rights. The quantum of available Grade B & C office space has decreased by 49% since 2009.

The technology sector has continued to be the most active occupier type in the regional office market. The tech sector accounted for 26% of take-up in 2020, which was the highest proportion across the market. This trend has been evident in recent years, with technology occupiers accounting for the highest volume of take-up in the last three years.

Strong VC investment has enabled the growth of the sector outside of London. There's been £6.1 billion of VC invested in technologies companies headquartered outside of London in the last five years. The South East, East of England, and the South West have received the highest quantum of VC in this time period, which bodes well for future take-up from the sector.

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