Investor demand polarised as prime yield remains static
Investment volumes reached £3.6 billion at the end of H1 2022, which represented a 4% increase from H1 2021, and is 15% above the long-term average. This has been primarily caused by several large transactions completing in H1 2022. There were nine deals over £100 million in the first half of the year, which is the second highest total in the last ten years.
Notable deals included LCN Capital Partners forward funding Unilever’s Kingston Campus for £245.6 million, reflecting a yield of 4.6% and Pontegadea acquiring 177 Bothwell Street, Glasgow, for £215 million. This was the largest single-office investment transaction ever recorded in Scotland. Overseas investors remain the most active investors in the market, accounting for 49% of investment in H1 2022.
The robust occupational fundamentals of the regional office market have appealed to investors seeking core or core plus opportunities. All Big Six regional cities have below two years of Grade A supply. The appeal was evident by Blackstone’s first acquisition in the market in H1 2022, acquiring The Colmore Building, Birmingham, for £182 million.
The turbulent macroeconomic outlook and the rising cost of debt have resulted in the prime regional office yield trending upwards. There has been yield softening for secondary assets, with Glasgow, Leeds, M25, Edinburgh and Bristol all experiencing an outward movement in their secondary yields in the last three months. The polarization of pricing is expected to continue with increasing build and debt costs driving secondary yields outwards.
The technology sector continues to drive demand in the occupational market
Demand in the occupational market continues to be spear-headed by the technology sector. This was evident in both the Greater London & South East office market and the Regional City office market in H1 2022, with the sector accounting for 32% and 21% of take-up recorded, which were the highest proportions when compared to other business sectors. Notably, the sector recorded an increase of 50% and 68% across both market areas from the take-up recorded in H1 2021, underlining the increased activity.
The sector has notably been active in Bristol, Manchester and Cardiff across the Regional City office market. In Bristol, the sector recorded the highest level of take-up for the first two quarters of the year when compared to the five previous years in H1 2022. Notable transactions in Bristol included Paymentsense acquiring 55,000 sq ft at Commercial Estates Group, EQ speculative development and Pax8 leasing 24,000 sq ft at No.2 The Distillery.
Focusing on the Greater London & South East market, the technology sector has been notably active in Reading and Guildford, where the sector acquired 53,000 sq ft and 50,000 sq ft, respectively. Reading has experienced the highest quantum of demand from technology occupiers in the last five years across the Greater London & South East market. The cluster of gaming companies in Guildford continues to expand, with over 70 companies based in the town employing 1,800 people, according to Guildford Borough Council.
The UK technology sector was valued at over $1 trillion according to the UK’s Digital Economy Council in 2022, which is only behind China and USA. This valuation is five times the scale of France, and double the size of Germany, illustrating the scale of the sector. Further growth from the sector, notably from start-ups and scale-up companies, is expected with £6.6 billion of venture capital invested into technology companies across the UK in H1 2022, which followed £6.1 billion of venture capital investment in 2021. The expansion of the sector bodes well for future demand for both conventional and flexible office space across the Regional City market.
There has been a surge in demand for flexible office space, with Workthere reporting a 143% increase in the number of enquiries from pre-Covid-19 levels at the end of H1 2022. Notably, there has been a change in the type of company requiring flexible office space. Workthere’s Flexmark 3.0 survey revealed that the proportion of corporate organisations (employing 101+ people) that occupy flexible office space has risen from 10% in 2020 to 24% in 2022. The quantum of flexible office space within a corporate’s portfolio is rising as hybrid working models become more widely adopted.
Landlords expect this to continue, with 72% of respondents from Savills Landlord Flex Survey expecting that occupiers will require more flexibility and being able to book space on an as-needed basis.