Investment volumes reached £625 million, which was 15% above the total recorded in Q1 2024, albeit still 41% below the five-year average. There is greater acceptance amongst investors of today’s pricing when compared to pre-2022 levels, which is supporting greater liquidity in the market. This trend is expected to result in an uptick in transactional activity in the second half of the year. The anticipation of further base rate cuts is also expected to stimulate investment activity across the market following the Bank of England’s decision to move in the base rate by 25 basis points (bps) to 4.25% in May.

The prime regional office yield moved in by 25 bps to stand at 6.75% in February and has remained at that level since. Notable transactions that occurred in Q1 2025 included Melford Capital buying EQ, Bristol, for £99.56 million, reflecting a yield of 7.40%, and Iroko Zen acquiring The Brinell Building, Brighton, for £27 million, reflecting a yield of 7.50%. Further yield compression is expected within the market as the current prime yield does not reflect the substantial rental growth that is evident in the occupational market.

The benefit of being a first mover to capitalise on the current disconnect in pricing in the investment market when compared to the occupational market performance is demonstrated when reviewing the pricing recovery in previous economic downturns. It only took five months for the prime regional office yield to harden by 125 bps in 2009 after sentiment improved amongst investors, highlighting the benefit of being a decisive investor.

Rental growth for refurbished stock continues amidst a lack of prime competition

The ongoing flight to quality in the market, coupled with a lack of supply, has provided a backdrop for the occupational market to experience significant rental growth. This trend has already materialised and is expected to continue, with the development pipeline limited across the regional office market. Manchester is the only regional market that currently has a speculative new build or comprehensive refurbishment scheme scheduled to complete after 2026.

All of the Big Six regional city markets have less than two years of prime supply based on the five-year average take-up highlighting the supply constraints present in the market.

This market dynamic presents an opportunity for current landlords and prospective purchasers of existing Grade A refurbished stock to benefit from the rental growth that the wider market has experienced. On average, across the Big Six regional cities, prime rents increased by 9% in 2024, and this is forecast to grow by, on average, 3% per annum for the next five years. Refurbished rents in both Glasgow and Edinburgh have exceeded new build rents, and the rental gap between Grade A refurbished and new build buildings in other regional city markets is expected to narrow. There are already multiple case studies across both the South East submarkets and Big Six regional cities of Grade A refurbished buildings benefitting from the current pricing arbitrage, where the rental tone within the building has increased by over 25% on the current passing rent.

The prime and Grade A refurbished rental gap could further grow if an off-plan pre-let for a new development was secured across the regional cities. Savills has forecast an average 15% increase on the current prime rent across the Big Six regional cities if an off-plan pre-let was achieved, which could provide further rental growth opportunities for Grade A refurbished stock.

Despite the ongoing economic and geopolitical uncertainty impacting business confidence, take-up levels across both the Big Six regional cities and Greater London & South East markets have been robust. Take-up recorded in Q1 2025 was 9% and 35% above Q1 2024, respectively. Notably, in Manchester and Leeds, the take-up recorded in Q1 2025 surpassed the pre-Covid 19 five-year average. This followed good levels of leasing activity in 2024, where in Birmingham, Leeds and Edinburgh, annual take-up also exceeded the pre-Covid 19 average.

The flight to quality from occupiers is supporting take-up for both Grade A and prime buildings across the markets, with occupiers seeking high-quality working environments that can help attract and retain staff in a competitive labour market.

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