■ With the UK economic recovery firmly on track, we believe the regional property markets are the next beneficiaries of the ripple of recovery outwards from London and the South East.

■ According to Deloitte, perceptions of economic uncertainty are at a three-and-a-half year low and risk appetite among big corporates are at a six-year high. Revisions to the business investment data show it has now increased at a relatively punchy rate for four consecutive quarters to stand 8.5% up on a year ago.

■ For the UK economy, to make up the ground lost over years since the recession, it is vital that growth spreads out from London and into the regions. The key towns and cities which have healthy and robust local economies, are well placed to support growth and provide opportunities for businesses to expand.

Regional investment market

■ Looking specifically at the investment market, there has been a steady drift of investor aspirations away from the desire to protect income and towards the recovery-focused aspiration of finding higher returns with a degree of letting risk.

■ In our last report we suggested that the tone of prime yields in the regional office markets were around 5.75%, and that this was going to trend downwards due to rising investor interest in both the regional cities and the differential between London and the top regional cities.

■ Although we don't expect yields to come in at the rate they did in 2013 (50bp since March 2013), we expect prime yields to move to 5.5% in key regional cities as we go through the year. The national average prime yield is now well down from its 2009 peak of 7% and now stands at 6%.

■ There is still a limited desire to sell, however, investor appetite for regional offices is increasing and investors are looking more closely at the regions as available space reduces, with limited speculative space being developed, which could fuel investor interest and subsequent pricing as we move into 2014.

■ This intensity of demand has resulted in some transactions achieving above their asking price as seen with SWIP's £34.5m purchase of Sunlight House in Manchester, originally marketed at £28.5m.

■ We have also seen assets which would have struggled to sell 18 months ago acquired off market below their previous marketing yield. Helical Bar purchased Churchgate House and Lee House in an off-market transaction for £34m (21m 2.5 years ago) from a joint venture between Angelo Gordon and Dunedin Property. There is currently circa 35% vacant, providing Helical with a number of Asset Management opportunities.

■ Towards the end of 2013, we also started to see a pick-up in investor demand for secondary assets where the yield has over corrected on the back of the last few years of heightened risk-aversion. Hodge House in Cardiff is a prime example of a well let office building in a secondary location, with Grade A specification. The 143,000 sq ft building was purchased by L&G from Aberdeen Asset Management, it was acquired for £18.87 million representing an NIY of 9%. A similar building would have achieved well over 10% only 12 months earlier.

■ This mounting demand saw office transaction volumes reach a six year high of £23bn in 2013. This was 55% up on 2012 and only 10% off 2007 peak levels. Although the proportion of office investment in the regions was down on 2012, the actual volume of investment was up 26%. We expect this figure to increase in 2014.

■ UK institutions are becoming more dominant in the regional cities and are starting to look more closely at key regional cities. They made up 33% of volumes in 2013 compared to 18% in 2012.

■ While risk-averse international investors will continue to be heavily biased towards London, the more risk-embracing investors will be looking to capitalise on the wide spread between London and regional yields, as well as the even wider spread between prime and secondary. Overseas investors accounted for 48% of volumes in 2013, a sharp increase on their 2012 share of 23%. A prime example of this is the sale of one Snowhill to Union at the end of 2013. This sold for £125m with an equivalent yield of 6.1%.

■ 2014 is likely to see sustained levels of demand for prime stock, but a significant lack of stock due to increased levels of activity in 2013. This level of demand is being driven by the weight of money looking to be placed into the sector chasing yield and stability that is not available in other asset classes, and in some instances to rebalance asset allocations for some who saw strong performance in equity markets in 2013.

■ For the top regional office markets falling vacancies and recovering tenant demand, coupled with little or no speculative development activity, will fuel a rental recovery. The yield spread compared to London offices should entice further investment driving capital value growth.

Taken from
Spotlight: Regional Office Market Report - April 2014