Despite a gain in occupier activity in the UK office sector, confidence in the market is falling as prices appear out of line with a new austere reality. Outside of prime properties, demand problems are taking their toll on the market, making sound asset management and long-term income key to real estate investment now. See the following article from Property Wire for more on this.
Total office occupier activity in the third quarter of 2010 increased across the six key UK markets outside London, according to the latest report from real estate consultants Jones Lang LaSalle.
It was, however, driven primarily by robust volumes in West London and Manchester with activity remaining more muted in other markets. Given the anticipated public sector job losses and knock-on impact on the private sector, future demand will continue to be driven by structural demand and portfolio churn, the report points out.
With such a poor demand outlook it remains to be seen whether any one business sector will stand out and help drive recovery over the next 12 months. However, Jones Lang LaSalle forecast’s that Edinburgh will be the only center to see an increase in annual office take up, with volumes anticipated to remain at 2010 levels in other key markets monitored.
Prime rents were relatively stable in the third quarter although increases of 1.8% and 1.9% were recorded in Birmingham and Glasgow respectively, albeit they were driven by the shortage of Grade A supply rather than any recovery in demand.
According to Jones Lang LaSalle’s Q3 Office Clock, which compares the relative position of markets in their rental cycle, rents have bottomed out in Glasgow and Manchester with rental growth being seen in West London.
In the secondary market there remains more flexibility as landlords continue to be extremely competitive, in order to secure tenants, and further softening of Grade B rental values is anticipated in most markets.
‘Over the last 18 months, we have seen tenants hunt quick wins to cut costs. In quarter three we began to see signs of a shift away from this defensive position and instead place an increasing focus on cost avoidance and selective opportunism. We anticipate that this type of opportunistic activity will persist in the UK markets and will be the primary driver of occupier demand into the medium term although it is likely that there will not be a stand out business sector to drive recovery in 2011,’ said James Finnis, head of Jones Lang LaSalle’s National Offices team England.
According to Cameron Stott, director of Jones Lang LaSalle’s Edinburgh Agency and Development team activity in Edinburgh has improved on the previous year with the main driver being the financial sector with occupiers being driven by a combination of expansion and structural demand. ‘Glasgow continues to perform well defying the economic outlook for the UK with there being a real prospect of a shortage of supply in 2011,’ he said.
With the exception of Birmingham, where a significant office portfolio deal completed, investment volumes across the UK’s regional markets fell in comparison to the second quarter of 2010. Given the weak outlook for the UK occupier market, focus remains on core and core plus assets and it was a lack of availability of this product that was in part constraining activity, the report also shows.
While investor sentiment remains positive Jones Lang LaSalle’s quarterly measure has recorded a second consecutive quarter of sentiment decrease. This is partially due to the perception that prices have risen too sharply against the weak economic and occupational backdrop but also fueled by concerns linked to sovereign debt, the government austerity program and the pricing of other asset classes.
Prime yields were stable over the quarter at 6% in the major UK centers and 6.5% in the Western Corridor, although in Glasgow the sale of The Equinox Building reflected a net initial yield of 5.75%, illustrating the attractiveness of properties with long term income.
‘With stable yields forecast, any capital value growth will have to be driven by rental growth. Although our forecasts for rental growth are positive they are relatively weak and this will keep capital values fairly flat going forward. Given stable capital values, expected total returns will be driven predominantly by income return, emphasizing the importance of asset management,’ said Mark Wilson, joint head of Jones Lang LaSalle’s National Investment team in England.
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