■ The recovery in the UK property market was further confirmed this year. Capital value growth, for the IPD Monthly Index for All UK Property, is showing 5.8% growth over the half year.

■ There is a marked difference between the three main property sectors. The office sector is out-performing all other sectors at 8.6%, which has been driven by Central London. Over the last year Central London offices have seen a 21% rise in Capital value growth, with the regions seeing only 8%, with the expectation that the regional office markets still have further to go.

■ Investors have already been encouraged by significant value gains right across the UK regional market in the first half of 2014. There is growing confidence to invest outside of London and this has been led by the UK institutions, particularly for the office sector. This group of investors now account for 46% of the office investment market to September 2014, compared to 33% at the same period in 2013.

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■ The regional markets are now seeing significant investment activity as the ripple effect moves out from London. The improving occupier market, with requirement levels increasing, is the driver of this higher level of positive sentiment.

■ With inflows into retail funds continuing and their greater allocation to property, the weight of money targeting commercial property shows no sign of abatement. This will generate further downward pressure on yields.

■ Office investment volumes reached a six year high of £23 billion in 2013. This was 55% up on 2012 and only 10% off 2007 peak levels. The proportion being invested in office markets outside London has risen sharply in 2014.

■ Regional volumes only made up 16% of total volumes in 2013 and to date they make up 27%. Encouragingly, to date, total regional volumes are only 9% down on the 2013 end year figures. We expect this trend to continue as we go through the rest of the year.

■ Over the past two years, office investment yields in the UK have been trending downwards due to rising investor interest in regional cities, lack of available stock, increasing amounts of money to invest and the differential between London and the regional cities.

■ At 5.05%, NFU Mutual has set a record yield this cycle for Chancery Place, a prime Manchester office, which is evidence of the strength and depth of the investor recovery in the key regional markets. Recent deals proceeding this for prime offices such as One Piccadilly Gardens and Direct Line House achieved just above 5.5%.

■ We expect regional yields in tier one cities will reach sub 5% by the end of the year. In some markets this will be exacerbated by the lack of good quality product. However, these value improvements are likely to encourage the release of more stock to the market.

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■ Manchester has already started to buck the trend and is now beginning to see an increased level of investment stock, including some very high profile sales such as the sale of City Tower on behalf of Bruntwood, which has recently transacted at £130 million (7% yield) to Schroders, as well as a number of larger prime investments such as One Spinningfields and One Hardman Boulevard.

■ The largest regional deal in 2014, and in Manchester's history, was the deal where M&G Real Estate purchased the 500,000 sq ft Manchester office space let to RBS for around £320 million. The purchase of 1 Spinningfields Square was made on behalf of an internal client fund of M&G Real Estate; 1 Hardman Boulevard was purchased on behalf of a third party institutional client of M&G Investments. The two Grade-A offices are leased in their entirety to RBS for a further 23 years and are subject to annual fixed uplifts of 3%.

■ Another significant deal in terms of size this year has been M&G Real Estate's £140m acquisition of the flagship Two Snowhill building in Birmingham from fund manager Hines. The deal, reflects a net initial yield of sub 6%, between M&G and Hines Interests Limited Partnership on behalf of Hines European Development Fund II.

■ Two Snowhill is a 319,000 sq ft, 14-storey multi-let building that completed last year. Tenants include Wragge & Co, serviced office provider i2 Group and HS2 Ltd, which took 90,000 sq ft within the building in July.

■ Although the outlook for the UK office market is a positive one, with strong demand from the UK institutions, this severe lack of available stock, in particular Grade A, has led to a pick-up in investor demand for secondary assets in strong locations, where a successful refurbishment will lead to rental growth and significant increase in values.

■ Examples of these type of sales in 2014 include the former Bank of Wales building known as ‘Plas Glyndwr' in Cardiff, which was acquired by Ardstone Capital for £3.5 million reflecting £100 per sq ft. They are planning a comprehensive refurbishment of the building.

■ 55 Colmore Row in Birmingham, is a 150,000 sq ft building in a prime location with asset management/redevelopment opportunities, which is let to Wragge & Co until 2017 at a passing rent of £3.3 million. The property has recently been acquired by IM Properties for £34 million, which equates to a NIY of approximately 9.25%.

■ With a limited amount of prime stock available to occupiers over the last 12 months, coupled with the pent up demand implied by upcoming lease breaks, rental growth is becoming a reality. This has resulted in some transactions achieving above their asking price, as seen with Vintry House, Bristol, which was originally brought to the market for £3.54 million. This property generated strong levels of interest finally selling at £4.4 million in July 2014, 24% above asking.

■ Small lots and lack of liquidity in the regional investment market may lead to investor disappointment going forward, however, the next big opportunity may be to package up groups of smaller assets to create high quality regional portfolios which are large enough to satisfy investment requirements.

■ In our last report we predicted that investors should start to move up the risk curve and start backing speculative development in the regions as we move through 2014. Part pre-lets are still very much on the agenda, however, we believe that with institutions now having money for funding and with a restored market confidence and positive sentiment, large scale speculative development should follow in the next 12 months.

Taken from
Spotlight: Regional Office Market Report - October 2014