UK REGIONAL CITIES OFFICE MARKET REVIEW 2018 - RESEARCH - Knight Frank

 
UK REGIONAL CITIES OFFICE MARKET REVIEW 2018 - RESEARCH - Knight Frank
RESEARCH

UK REGIONAL CITIES
OFFICE MARKET REVIEW
2018
UK REGIONAL CITIES OFFICE MARKET REVIEW 2018 - RESEARCH - Knight Frank
UK REGIONAL CITIES REVIEW 2018

CONTENTS                                                              FOREWORD
The UK Regional Cities Office Market Review analyses not only
the performance of the ten major UK regional cities, but also gives
opinion and insight into future trends.

2-3        Foreword
4-5        UK Economic Outlook
                                                                      ALASTAIR GRAHAM-CAMPBELL
6-7        The Renaissance Period
                                                                      PARTNER, REGIONAL HEAD
8-9        Investment
10-11      City Markets
                                                                      A common sentiment emerges from
                                                                      discussions with our local offices:          “Take-up reached
12-13      Aberdeen                                                   Positivity. The reason? The UK                 a fifteen year high
14-15      Birmingham
                                                                      regions are prospering despite an
                                                                      unprecedented breadth of challenge and         supported by headcount
16-17      Bristol                                                    change. Regeneration and reinvention
                                                                      through public and private investment is
                                                                                                                     growth, business
18-19      Cardiff
                                                                      delivering results. New spaces are being       restructuring and new
20-21      Edinburgh
      Development Pipeline
22-23	
                                                                      created. New investment is forthcoming
                                                                      for infrastructure. Our major regional
                                                                                                                     market entrants.”
                                                                      cities have never been more in focus.
24-25      Glasgow
                                                                      A reflection on the property market in
26-27      Leeds
                                                                      2017 exudes this positive tone. Occupier     Most remarkable perhaps, is that the
28-29      Manchester                                                 demand for office space defied wavering      strong results have coincided with a
                                                                      confidence, with take-up reaching a          period of instability. Brexit is now just
30-31      Newcastle
                                                                      fifteen year high supported by headcount     thirteen months away, with optimism and
32-33      Sheffield                                                                                               pessimism toward the prospect expressed
                                                                      growth, business restructuring and
34-35      Knight Frank View                                          new market entrants. Office investment       in equal measure. Whether for or against,
                                                                      volumes were up by a third, as UK            the trading relationships of the UK could
36-37      Data Dashboard                                                                                          profoundly change. Uncertainty will be
                                                                      Institutions returned on the buying side
38-39      Key Contacts                                               to accompany significant and sustained       with us for some time yet.
                                                                      interest from international investors. Not   Nonetheless, it is clear that the UK
                                                                      quite a boom marketplace, but certainly      regional cities offer the right product
                                                                      one that outstripped expectations. What      to capture the prevailing mood of both
                                                                      has been very noticeable is that target      occupiers and investors. There is now
                                                                      locations of occupiers and investors         momentum behind creating the places
                                                                      are now progressively more fluid.            where innovation can flourish and
                                                                      Opportunity searches are conducted on        support growth. Whilst the political
                                                                      a national and often international scale.    arena is sure to dominate the headlines,
                                                                      This has meant from a Knight Frank           the transformation of the UK regional
                                                                      perspective, our regional client base has    cities will continue and provide a solid
                                                                      grown, as cross market advice becomes        foundation for an active property market
                                                                      a prerequisite.                              in 2018.

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UK
                                                                                                                                                                                                          “We believe that the uncertainty
                                                                                                                                                                                                             surrounding the economy
                                                                                                                                                                                                                makes a general rising tide

ECONOMIC                                                                                                                                                                                                           for UK PLC unlikely.”

OUTLOOK
                                                                       04                                                03

        WRITTEN BY
                        The UK economy faces a year
                        of challenges and opportunities
                        in 2018, and while mindful of the
                        former, we should not overlook
                        the latter.
                        How one views the year ahead comes
                        down to whether you are a ‘glass half
    JAMES ROBERTS       full’ or a ‘glass half empty’ person.
      Chief Economist
                        After all, there is plenty of evidence to
                        support either view. Those who take the
                        half empty view can draw justification
                        from the uncertainty surrounding Brexit,       01                                                                               02
                        sluggish GDP growth, and the squeeze
                        on consumer incomes. For those who
                        favour half full, there is the robust
                        labour market, the rapid growth of new
                        technology firms, and rising export
                                                                     01                                                       02                                             03                                             04
                        demand for manufacturers, to provide         ROBOTICS AND ARTIFICIAL                                  NEW WAVE FINANCE                               SHRINKING SUPPLY CHAINS                        GREEN INDUSTRIES
                        evidence to support their view.              INTELLIGENCE (AI)
                                                                                                                              In China, some cities are rapidly turning      Even prior to the vote for Brexit, there had   In 2017, the UK had its first ever day
                        So who will be proved right: the optimist    This part of the digital revolution has been             cashless, as more people pay for goods         been a movement towards shorter supply         operating the electricity network without
                        or the pessimist? We believe that the        a rising tide for some time, but it is about to          with their mobile phones. Even the             chains, reflecting more customisation in       coal, drew 52% of its power from low
                        uncertainty surrounding the economy          accelerate in the UK in particular as the result         buskers accept electronic payments             manufacturing and a desire to speed goods      carbon sources during the summer
                        makes a general rising tide for UK PLC       of the move towards Brexit. Firms will no                now. A combination of ubiquitous smart         to market. With the UK leaving the EU, more    months, and broke records for wind power
                        unlikely. Our forecast for 2018 GDP          longer be able to rely on labour from the EU,            phones, and pressure on regulators to          firms are looking to buy supplies locally,     production, according to National Grid.
                        growth is 1.5%, which is less than           but the tap is being switched off at a time when         open up the market, means banking in           which could result in new manufacturing        A recent report from the International
                        the 20-year annual average of 2.0%.          unemployment is at its lowest level in 42 years.         the UK is set for huge disruption. We          firms being established. These will need       Renewable Energy Agency suggested
                        However, we expect to see pockets of         As a result, firms will invest more in automation        believe the new wave of fin-tech firms,        office space for their HQ and design           green energy could be cheaper than
                        outperformance that property investors       and AI to fill the gap, creating demand for              lacking the historic ties to London, will be   functions. Also, we see the move towards       fossil fuels by 2020. We see green
                        can target to achieve better returns. Here   office space from the technology firms. We               more open-minded on where they locate.         customisation creating demand for city         energy firms becoming more important
                        are the four sectors of the economy that     see activity weighted towards cities with                This could open up a new source of             centre design offices, as manufacturing        in the economy and office market
                        may deliver strong growth in 2018.           universities that have strong IT departments.            office demand for the regional cities.         firms employ more creative workers.            going forwards.

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THE
RENAISSANCE
                                                                                                                                                                                            “Business confidence, investment and hiring
                                                                                                                                                                                              intentions are all positive, relative to their position
                                                                                                                                                                                              a year ago, although the twists and turns of Brexit

PERIOD                                                                                                                                                                                        may well bring volatility to these indicators.”

                                                                                               01                                            02                                              03                                          04
WRITTEN BY                                      commitment to Birmingham, while
                                                cost and efficiency drivers influenced a
                                                rethinking of the Government’s estate
                                                and with it emerged sizeable deals in a
                                                                                               INCREASED OCCUPIER MOBILITY                   COST SENSITIVITY BUT NOT AT THE                 FURTHER DISRUPTION                          INCREASED DEMAND FOR SERVICE
                                                number of regional markets.                                                                  EXPENSE OF WORKPLACE QUALITY                    FUELLING DEMAND                             2018 will be the year in which the co-working
                                                The perfect storm was realised through
                                                                                               As supply tightens in some markets,           OR EXPERIENCE                                   A new wave of technology –                  revolution hits the UK regions. There will
                                                                                               but the need for cost effective business
                                                two significant supply side drivers.                                                         Given prevailing economic conditions            automation, AI, and robotics, will          be a multiplication of co-working providers
                                                                                               transformation intensifies, we anticipate
DR. LEE ELLIOTT
                                                First, the emergence of a strong                                                             cost sensitivity will be high, but occupiers    create opportunities to enhance             ranging from new challengers, established
                                                                                               a broadening of search areas and a
Partner, Head of Commercial Research            pipeline of high quality, amenity rich                                                       increasingly accept that low cost, low          business efficiency and productivity.       operations and also traditional supply side
                                                                                               growing level of competition between
                                                product located within city centres.                                                         quality real estate options are actually a      Back and middle office functions will be    players responding to the challenge with
                                                                                               regional centres for this mobile demand.
Occupier activity returned                      There was a clear step change in the
                                                                                               Occupiers will undertake extensive
                                                                                                                                             false economy as they create expensive          reshaped and talent requirements will       their own offer. There will also be greater
to the UK regions in a major                    physical product found in regional             research in relation to market dynamics
                                                                                                                                             staff churn. It is on average ten times more    shift away from clerical and processing     demand from corporates seeking larger
                                                                                                                                             expensive to replace a staff member in the      skills and towards technical and creative   scale solutions. The key point, however, is
way during 2017, but can the                    cities. Second, the vibrancy, cohesion         and options, but also critically in respect
                                                                                                                                             regions than it is to accommodate them.         skills. As businesses make plans for this   that co-working brings a new approach to
                                                and relative affordability of the regional
momentum be maintained?                                                                        of workforce availability and / or the
                                                                                                                                             Real estate costs will be scrutinised but       next cycle of disruption, new demand        customer service within the industry. Highly
                                                cities increasingly appeals to young           impact of any relocation on core staff.
Against a backdrop of persistent geo-           professionals. Different lifestyle choices                                                   not at the expense of creating a workplace      will be generated.                          serviced, scalable environments that give the
political uncertainty and slow economic         are creating a deepening supply of                                                           that supports staff recruitment, retention                                                  occupier a turn-key solution with no hidden
growth rates, occupier activity in the          regional talent that occupiers recognise                                                     and their workplace experience.                                                             costs will be in great demand.
regional markets surprised on the upside.       and buy-into.
More than 7 million sq ft of office space
was let across the ten core markets             So, as we enter into 2018, a key
reviewed in this report. On this basis, the     question must be, can the regional
markets were not simply resilient – the         renaissance be sustained?
aggregate volume was, after all, some           Business confidence, investment and
1.3 million sq ft above the ten-year            hiring intentions are all positive, relative
average. Instead, 2017 represented              to their position a year ago, although
a clear renaissance for occupational            the twists and turns of Brexit may well
markets in the regions.                         bring volatility to these indicators. The
They were beneficiaries of a perfect            potential brake on momentum is actually
storm. Businesses, under huge pressure          on the supply side in select cities.
from digital disruption, brought change         We do not envisage aggregate leasing
to business models which fuelled market         volumes extending beyond the levels
demand. Furthermore, the economic               reached in 2017. However, the structural
backdrop forced many to actively                drivers underpinning occupier demand
consider and commit to locations that           remain firmly in place. The outcome
presented a property and operational            will therefore be strong enquiry and
cost advantage or a cost profile more           requirement levels, intense competition
appropriate to the type of business             amongst occupiers to secure preferred
function being fulfilled. Finally, regulatory
                                                options and pent-up demand from those
and political pressures fuelled significant
                                                unable or unwilling to compete.
regional requirements. The ring-
fencing of UK retail banking operations         In our view, there will be four key
has supported increased financial               characteristics of occupier demand in
                                                                                                                                                           55 COLMORE ROW
services activity, most notably HSBC’s          the regional markets during 2018:

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                               NT
    ME                                                                                                                                                                         Figure 1
                                                                                                                                                                               Office investment transactions by sizeband
                                                                                                                                                                                                                                                            strong competition from investors, but this
                                                                                                                                                                                                                                                            in turn will begin to erode the differential.
                                                                                                                                                                                                                                                                                                            have been increasing their share of
                                                                                                                                                                                                                                                                                                            regional offices purchases, and are under
                                                                                                                                                                                                                                                                                                            significant pressure to deploy further
                                                                                                                                                                                                                                                            Ultimately, cautious optimism on
                                                                                                                                                                                                                                                            occupation markets, combined with               capital. London and parts of the south
                                                                                                                                                                                                                                                            robust investor demand is supporting            east markets remain too competitive
                                                                                                                                                                                                                                                            return expectations. Performance data           and/or expensive for some such funds,
 EST
                                                                                                                                                                                                                                                            from IPD shows that while capital growth        meaning prime offices in regional
                                                                                                                                                                                                                                                            in regional markets typically lagged the        locations will be an attractive alternative –
                                                                                                                                                                                                                                                            London market in 2017, values have been         as long as the stock can be found. As the
                                                                                                                                                                                                                                                            steadily improving. This, combined with         UK faces a period of moderating growth
                                                                                                                                                                                                                                                            a stronger income return than for London        and uncertain politics, prime assets with
                                                                                                                                                                                                                                                            offices, has meant that total returns in        attractive income profiles could prove
                                                                                                                                                                                                                                                            regional office markets have in many            scarce, due to the difficulty that owners
INV

                                                                                                                                                                                                                                                            cases been higher than for London.
                                                                                                                                                                                                                                                                                                            will face in recycling capital effectively.
                                                                                                                                                                                                                                                                                                            Some will calculate that only premium

                                                                                                                                                                                                                                                            OUTLOOK                                         pricing will compensate for the challenge
                                                                                                                                                                                                                                                                                                            of reinvesting, and absent this, will prefer
                                                                                                                                                                                                                                                            The latest IPF consensus report shows           to hold. As a result, demand for good
                                                                                                                                                                                                                                                            the range of forecasts for UK office            quality secondary assets may pick up.
                                                                                                                                                                                                                                                            returns in 2018 is wider than for any
                                                                                                                                                                                                                                                            of the other major property sectors,            Overseas investment rose up in the last
                                                                                                                                                                                                                                                            highlighting the degree of uncertainty          quarter of 2017 and we expect further
                                                                                                                                                                                                                                                            about the outlook. However, recognising         interest in 2018. One reason is that the
                                                                                                                                                                                                                                                            that 2018 is likely to see performance          weight of capital targeting prime offices
                                                                                                                                                                                                                                                            moderate across all sectors, we                 in European cities has driven yields to
                                                                                                                                                                               Under        £10m-        £25m-        £50m-        £75m-       £100m+       nevertheless see plenty of reasons to
                                                                                                                                                                               £10m         £25m         £50m         £75m         £100m                                                                    unprecedented lows, and has left many
                                                                                                                                                                               £1.1bn       £1.3bn       £1.5bn       £0.9bn       £0.4bn      £2.5bn       expect a buoyant regional office market         UK office markets looking comparatively
                                                                                                                                                                               (278deals)   (81 deals)   (43 deals)   (15 deals)   (4 deals)   (13 deals)
                                                                                                                                                                                                                                                            in 2018, not least due to the variety of        better value. We expect this will cause
                                                                                                                       122 WATERLOO STREET
                                                                                                                                                                                                                                                            capital sources active in the UK.               some European investors to reappraise
                                                                                                                                                                               Source: Knight Frank/Property Data
                                                                                                                                                                                                                                                            Having initially been less active buyers        the UK, adding to the overseas demand
                                                                                                                                                                                                                                                            post-referendum, institutional funds            already active in regional UK cities.
 WRITTEN BY                                   significant transactions were announced      public sector relocations of office staff to
                                              (but not completed) in the final months of   regional cities. Meanwhile, on the supply
                                                                                                                                                                               Figure 2 UK regional investment by capital source
                                              the year.                                    side, the delivery of new office space has
                                                                                           remained relatively subdued, exacerbating                                                                     4%
                                              Overseas investors accounted for around
                                                                                           the shortages of modern office stock in
                                              40% of purchases during 2017, with
                                                                                           many of the largest cities, and leading to
                                              domestic institutions making up a further                                                                                          others 13%
                                                                                           stronger prospects for rental growth.                                                 OVERSEAS INVESTORS £3.1BN
                                              22% – shares that on the face of it have
                                                                                           The ever-present hunt for yield                                                                                                                                                                                                                                          SOUTHERN
                                              changed little in previous years. Yet the                                                                                                                                                                                                                                                                             AND EASTERN
 WILLIAM MATTHEWS                                                                                                                                                                                    15%
 Partner, Capital Markets Research            most recent quarterly statistics show a      has clearly also been supportive of
                                              clear rise in the share of both of these     investor interest. Making the inevitable
                                                                                           comparison to London pricing, both
 MARKET OVERVIEW
                                              two purchaser types, to the extent that
                                                                                                                                             ISource of capital (£ millions)

                                                                                                                                                                                                                                                                                                                                                                                              Destination of capital
                                              they jointly accounted for well over 60%     overseas and domestic investors alike                                                                      27%
                                                                                                                                                                                 UK INSTITUTIONS £1.7BN
                                              of purchases by volume in the last two       have benefited from higher yields when
 Office investment outside of London
                                              quarters of 2017. Meanwhile, private         purchasing offices in the UK’s regional
 reached £7.7bn in 2017, 30% more than                                                     cities, even when the assets and
 in 2016, in a clear sign that the slowdown   investors eased back.                                                                                                              PRIVATE PROPERTY CO £1.1BN                                                                                                                                                        NORTHERN
                                                                                           covenants have been of similar quality.                                                                                                                                                                                                                                 AND SCOTLAND
 in office investment beyond the M25 has      So what has been driving the interest        But while prime office yields in London
 begun to reverse. Indeed, the pace of        in regional markets? On the occupier         remained unchanged throughout 2017,                                                   OCCUPIERS £0.7BN                 41%
 activity is increasing. After a relatively   demand side, there is no doubt that          recently announced deals suggest that
 slow start, investment in the second half                                                                                                                                       OTHERS £0.6BN
                                              the fundamentals have been improving         for regional cities, yields are still under                                                                                                                                                                                                                             MIDLAND
                                                                                                                                                                                                                                                                                                                                                                   AND WALES
 of the year was over twice as high as in     across a number of fronts. 2017 saw jobs     downward pressure for the best stock.                                                 PRIVATE INVESTORS £0.3BN
 the first, and the sense of momentum         growth across most of the UK’s regions,      The regional cities’ yield advantage over                                             QUOTED PROPERTY CO £0.2BN

 was heightened as a number of                boosted by high-profile private and          London remains sufficient to generate                                               Source: Knight Frank/Property Data                                                                                                  Note: Totals reflect office investment outside of Greater London in 2017

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            S
          ETK
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UK REGIONAL CITIES REVIEW 2018

ABERDEEN
OCCUPIER MARKET                                In May, Chrysaor Holdings Limited
                                               (Chrysaor), took 47,700 sq ft at The
                                                                                                PRIME RENT 2017          INVESTMENT VOLUMES 2017
                                                                                                                                                       INVESTMENT MARKET                              FCFM Group Ltd (FCFM) acquired two
                                                                                                                                                                                                      properties in Aberdeen during the year.
With the worst of the oil & gas downturn       Capitol on Union Street to establish a                                                                  Following a subdued market in 2016,            The first was Quattro House, bought for
now past and most rationalisation programs     North Sea Operations HQ. Since opening
                                               in 2016, the £30m redevelopment of
                                                                                                                                    £                  the impasse between buyer and seller           £7.7m. The property is let to Petrofac
seemingly complete, occupier activity                                                                                                                  expectations finally began to soften in
showed steady improvement in 2017. Office      a former cinema has now leased 85%           £32.00 per sq ft             £99m / +419%                  2017. Office investment volumes for
                                                                                                                                                                                                      Facilities Management until 2024.
                                                                                                                                                                                                      Following this, FCFM acquired Trafalgar
take-up reached 468,250 sq ft by year end,     of available space. Other tenants in              (2016-2017) 0%                                        the year fell just short of the £100m
                                                                                                                                                                                                      House for £4m. The other deal to
a total that, although 18% below the 10-year   the building include Price Waterhouse                                                                   mark at £98.8m, this being the highest
                                                                                                                         % OF DOMESTIC INVESTORS                                                      complete was the acquisition of Ensco
annual average, reflects a 68% increase        Coopers (PWC) and Dentons UKMEA LLP.         PRIME RENT 2018 (FORECAST)                                 total achieved since 2014. The offer of
when compared to 2016.                                                                                                                                                                                House by a private investor for £6.5m
                                                                                                                                                       favourable pricing when compared to
                                               A combination of development                                                                                                                           reflecting a yield of 7.34%.
Supporting the rise was 138,500 sq ft lease                                                                                                            regional competitors in addition to signs
                                               completions and ‘grey space’ coming
taken by Total E&P UK at West Campus,                                                                                                                  of an improving occupier market, is            Similar to 2016, domestic money
                                               back to market meant a further rise in
                                                                                                                                                       beginning to fuel renewed interest.
Westhill. Although agreement was reached
in March 2017, the energy firm moved
                                               vacancy was recorded in 2017. Grade
                                               A availability increased to 753,800 sq ft
                                                                                            £30.00 per sq ft                      54%                  The sale of a 102,000 sq ft, newly
                                                                                                                                                                                                      accounted for the highest percentage
                                                                                                                                                                                                      of investment turnover, 54%. Given the
                                                                                                 (2017-2018) -6%
into the property in Q4 2017 following         during the year, a total twice that of the                                                              completed office at Prime Four Business        low number of transactions however,
refurbishment of the building. With a long     long-term average. This is the highest                                        PRIME YIELD 2017          Park to LCN Partners was the largest of        the skew toward UK investors isn’t
                                                                                                 TAKE-UP 2017
term tenant secured, landlord M&G have         level on record for the city. This total                                                                five transactions to complete during the       truly reflective of the market, with
since sold the freehold on the campus to       however, should represent the peak                                                                      year. The asset sold for £41.3m, a price       international buyer activity increasing.
Gulf Islamic Investments.                      in vacancy. The development pipeline                                                                    which reflected a net initial yield of 6.8%.
                                               consists of proposed schemes only, none                                                                 Lloyds Register have a 15 year lease on        Prime office yields remained at 6.50% in
The Total UK deal was one of three
transactions to complete over 30,000 sq ft     of which are likely to begin works unless     468,250 sq ft                      6.50%                  the building.                                  2017, meaning prime assets in Aberdeen
in 2017.                                       a pre-let is secured or a sustained market      Y-on-Y change +68%                                                                                     still offer a considerable discount when
                                                                                                                                                       In December, Gulf Islamic Investments
                                               recovery is recognised.                                                                                                                                compared to other regional centres.
The second largest letting saw Somebody                                                                                  PRIME YIELD 2018 (FORECAST)   purchased the freehold interest of West
                                                                                                GRADE A SUPPLY                                                                                        Notably, at this level, yields are 100
Cares extend their presence in Aberdeen.       In 2017, prime headline rents held firm                                                                 Campus, Westhill Business Park from
                                               at £32.00 per sq ft, albeit occupier                                                                    M&G Real Estate Ltd for £39.4m. The            basis points above the market peak of
The charity agreed terms on a new 51,150
sq ft lease at John Wood House. This           incentives remain particularly attractive.                                                              campus comprises of three properties,          5.50% recorded in 2007. Despite some
follows a 36,200 sq ft letting at Trafalgar    Rental values are expected to come under                                                                with Total E&P UK the major tenant. The        improvement to sentiment, pricing is
House in 2016, which was the largest           pressure in 2018 driven by a continued        753,800 sq ft                                             purchase price reflected a net initial yield   expected to remain stable in the coming
single transaction of that year.               market imbalance.                               Y-on-Y change +18%               6.50%                  of 7.87%.                                      12 months.

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BIRMINGHAM
OCCUPIER MARKET                              Square. The building will enable PWC
                                             to relocate its existing Birmingham
                                                                                              PRIME RENT 2017          INVESTMENT VOLUMES 2017
                                                                                                                                                     INVESTMENT MARKET                               £33.8m back in 2014. Tenants include
                                                                                                                                                                                                     Pinsent Masons LLP, Savills and the Royal
2017 proved to be an exceptional year        based operation from 19 Cornwall Street                                                                 Office investment turnover in Birmingham        Institute of Chartered Surveyors (RICS).
for occupier activity in Birmingham, as      as well as providing room for further                                                £                  reached £599m in 2017, 47% ahead of
                                                                                                                                                                                                     Other notable deals over £25m to
both resident firms and new entrants         growth. Occupation is scheduled for                                                                     the 10-year average for the city. Although
vied for city centre space. Office take-up   Q2 2019.                                     £33.50 per sq ft             £599m / +52%                  this total also represents a year-on
                                                                                                                                                                                                     complete in 2017 include the sale of 19
                                                                                                                                                                                                     Cornwall Street to Kier Property Group
increased by 45% to reach 1.01m sq ft                                                          (2016-2017) +3%                                       year increase of 52%, the number of
                                             Professional Services continue to                                                                       transactions was fewer, with 17 office          for £35.7m. The property is let to Price
by year end. This total is 34% ahead of
the 10-year annual average.
                                             form the largest source of demand in         PRIME RENT 2018 (FORECAST)   % OF DOMESTIC INVESTORS       sales completed compared to 18 last             Waterhouse Coopers (PWC) and Pinsent
                                             Birmingham. The sector accounted                                                                        year. Nonetheless, 2017 has seen strong         Masons LLP. Also at year-end, Royal
The 238,900 sq ft pre-let taken by           for 30% of take-up, with the RICS                                                                       investor interest sustained, with only          London Asset Management acquired 5
the Government Property Unit (GPU) at        (30,800 sq ft), Hogan Lovells (23,400                                                                   the limited number of opportunities,            St Philips Place for £45m. The building
3 Arena Central underpinned the rise.        sq ft) and Arcadis (22,900 sq ft) being                                                                 particularly at the prime end, restricting      is home to the Homes and Communities
The building will be the Midlands regional
hub for HM Revenue and Customs
                                             other notable firms to take new space        £35.00 per sq ft                      47%
                                                                                                                                                     the market.                                     Agency and the Criminal Cases Review
                                             in 2017. Underpinned by the GPU                   (2017-2018) +4%                                                                                       Commission, with the sale reflecting a net
(HMRC), alongside other government                                                                                                                   The year did bring a landmark investment
                                             letting, the public sector accounted for                                                                deal however. The acquisition of six            initial yield of 4.7%.
departments. Occupation is scheduled                                                                                       PRIME YIELD 2017
                                             the next highest proportion of take-up,      CITY CENTRE TAKE-UP 2017                                   assets at Brindleyplace by HSBC (Hail) for
for 2020.                                                                                                                                                                                            In contrast to 2016, overseas money
                                             comprising 27%.                                                                                         £265m stands as the largest office sale         accounted for the largest percentage
With demand for flexible office solutions                                                                                                            on record in Birmingham. Bought from
                                             With large scale development delivering                                                                                                                 of office investment in Birmingham
continuing to grow nationwide, Regus                                                                                                                 Hines Global and Lone Star, the portfolio
                                             new space to the market, Grade A                                                                                                                        during the year, 48%. This was largely
committed to two new leases in                                                                                                                       includes Three, Four, Five, Six and Nine
Birmingham during 2017. The largest saw      availability increased to 250,000 sq ft,           1m sq ft                      4.75%                  Brindleyplace, which comprise over
                                                                                                                                                                                                     due to the HSBC (HAIL) purchase being
the serviced office provider agree terms     although this is still 5% below the 10-         Y-on-Y change +45%                                                                                      made on behalf of international clients.
                                                                                                                                                     470,000 sq ft of grade A offices, with retail
on 76,000 sq ft at the newly refurbished     year average. At year-end, 1.6m sq ft                                                                                                                   UK Institutions accounted for 32% of
                                                                                                                                                     and leisure uses at ground level. The sale
                                             was under construction with delivery due    CITY CENTRE GRADE A SUPPLY    PRIME YIELD 2018 (FORECAST)                                                   investment volumes in 2017.
Crossway. Regus also took 33,300 sq ft                                                                                                               price reflected a net initial yield of 6%.
at the Lewis Building on a 12-year lease     before the end of 2020. Of this total, 1m
                                                                                                                                                     In addition, as the year was closing, TH        Prime city core yields reacted to the
for a reported rent of £26 per sq ft.        sq ft is speculative.
                                                                                                                                                     Real Estate bought 55 Colmore Row for           weight of investor interest during the year
Following an agreement in March 2016         Prime headline rents increased by 3% to                                                                 circa £100m. The 161,000 sq ft building         moving to 4.75%. At this level, prime
to take 90,000 sq ft, PWC took the           £33.50 per sq ft. We anticipate a further     250,000 sq ft                                             was renovated in 2016 by IM Properties,         yields are 25 basis points above the
remaining 58,600 sq ft at 1 Chamberlain      rise to £35.00 per sq ft in 2018.               Y-on-Y change +96%               4.75%                  who themselves acquired the building for        market peak of 4.50% recorded in 2007.

14                                                                                                                                                                                                                                              15
UK REGIONAL CITIES OFFICE MARKET REVIEW 2018 - RESEARCH - Knight Frank
UK REGIONAL CITIES REVIEW 2018

BRISTOL
OCCUPIER MARKET                                 Augustine’s Courtyard (31,800 sq ft) in
                                                Q1, leasing 10,000 sq ft at 1-5 Whiteladies
                                                                                                  PRIME RENT 2017          INVESTMENT VOLUMES 2017
                                                                                                                                                         INVESTMENT MARKET                            Bristol and Dyson Technology Ltd, with
                                                                                                                                                                                                      Dyson Technology Ltd having agreed a
The ongoing supply shortage in Bristol          Road in Q2 and taking a 27,300 sq ft                                                                     Office investment volumes in Bristol         record rent of £32.50 per sq ft.
served as a restraining factor for leasing      lease in 1 Cathedral Square in Q4. Not                                                £                  reached the highest level since 2006,
                                                                                                                                                                                                      In July, M&G Real Estate acquired
activity in 2017. Nevertheless, overall take-   for profit organisation Eduserv also                                                                     with £396m of assets sold during
up reached 614,000 sq ft, 12% above the         acquired the 16,000 sq ft Gyldan House,       £32.50 per sq ft             £396m / +13%                  the year. This total reflects a 13%
                                                                                                                                                                                                      the 62,000 sq ft, 66 Queen Square for
10-year average for the city and the third                                                        (2016-2017) +14%                                       increase when compared to 2016               £30.5m. The property is let to KPMG
                                                a purchase that will enable an operational
highest annual total of the past decade.                                                                                                                 and is 77% above the 10-year annual          and Handelsbanken. M&G Real Estate
                                                move from Bath.                                                            % OF DOMESTIC INVESTORS
                                                                                              PRIME RENT 2018 (FORECAST)                                 average. Interestingly, the rate of sales    also acquired 1 Georges Square in July
The growth of Bristol’s profile as a UK         Professional Services however, continue                                                                  increased sharply following the UK           for £26m. The property is let to Clarke
technology hub was a significant feature        to be the mainstay of activity in Bristol.                                                               General Election in June, with 75% of        Willmott with 5.75 years unexpired. The
of the market in 2017. Dyson Technology         The pre-lettings of 13,000 sq ft to                                                                      transactions completing in the second        other deal to complete above £25m was
Ltd’s leasing of 28,700 sq ft at Cathedral      intellectual property specialists, Mewburn                                                               half of the year.                            the acquisition of 100 Bristol Business
Square was most notable, with a record
rent of £32.50 per sq ft agreed. The
                                                Ellis, and of 27,000 sq ft to law firm,       £35.00 per sq ft                      59%                  Supporting the increase in activity was
                                                                                                                                                                                                      Park by Lime Property Fund (Aviva) for
                                                Simmons and Simmons, within Aurora at              (2017-2018) +8%
building had been the subject of a £7                                                                                                                    the sale of 10 Canons Way to a South         £30.06m reflecting a yield of 5.25%.
                                                Finzels Reach proved to be the flagship                                        PRIME YIELD 2017
million refurbishment in 2017. This deal                                                      CITY CENTRE TAKE-UP 2017                                   Korean investor advised by Knight Frank      Similar to 2016, domestic investors
                                                deals of the year. In all, the sector
was one of 38 transactions to TMT                                                                                                                        Investment Management (KFIM). The            accounted for 59% of investment in
                                                accounted for 24% of take-up.
occupiers during the year, including                                                                                                                     sale price was £95.5m which reflected
                                                                                                                                                                                                      2017, albeit overseas money would
local firm AMI agreeing terms on 12,000         At year end, just 3,272 sq ft of new                                                                     a net initial yield of 5%. The 177,000
                                                                                                                                                                                                      have contributed to funding in some
sq ft at One Brunswick Square and               Grade A space was available for lease.                                                                   sq ft property is entirely let to Scottish
Xmos taking 7,200 sq ft in Queens               Good quality secondhand space has              614,000 sq ft                      5.00%                  Widows Limited until November 2032.
                                                                                                                                                                                                      deals. Direct international investment
                                                                                                                                                                                                      increased, with overseas buyers
Quay. Overall the Technology Media              also been in decline, with just 122,053           Y-on-Y change -22%
                                                                                                                                                         The £33.5m sale of a long lease interest     accounting for 29% of volumes in 2017
and Telecoms sector accounted for a             sq ft available at year end. In the next
                                                                                                                           PRIME YIELD 2018 (FORECAST)   at One Cathedral Square to F&C               up from 17% last year.
third of take-up.                               12 months, the development pipeline is          NEW GRADE A SUPPLY
                                                                                                                                                         Commercial Property Trust was one
Following the 107,000 sq ft lease to HMRC       scheduled to deliver just 55,000 sq ft of                                                                of four other transactions to complete       The sale of several prime assets has
in 2016, the public sector remained a           new space together with 109,000 sq ft of                                                                 above £25m. Notably, the 2017 total of       evidenced a shift in yields in 2017.
strong source of demand. The University         comprehensively refurbished space. It is                                                                 five is the highest number of sales above    Prime office yields have moved in by
of Bristol was responsible for three new        widely anticipated that these totals will         3,272 sq ft                                            this threshold since 2011. One Cathedral     25bps in 2017, finishing the year in the
transactions, acquiring the freehold of         reduce before practical completion.               Y-on-Y change -94%              4.85%                  Square is fully let to the University of     region of 5.00%.

16                                                                                                                                                                                                                                               17
UK REGIONAL CITIES OFFICE MARKET REVIEW 2018 - RESEARCH - Knight Frank
UK REGIONAL CITIES REVIEW 2018

CARDIFF
OCCUPIER MARKET                              Canal Parade, meaning the Public Sector
                                             accounted for the three largest deals of
                                                                                            PRIME RENT 2017          INVESTMENT VOLUMES 2017
                                                                                                                                                   INVESTMENT MARKET                            of 5.5%. The 134,950 sq ft asset is let
                                                                                                                                                                                                to six tenants, including Blake Morgan
In a year punctuated by major political      2017 in Cardiff.                                                                                      2017 proved to be the strongest year         LLP, Julian Hodge Bank and MotoNovo
events, occupier demand for office space
                                             In terms of deal numbers however,                                                  £                  on record in terms of investment activity    Finance. Following this, Credit Suisse
                                                                                                                                                                                                bought Two Central Square for £56.5m
in Cardiff proved encouragingly resilient.                                                                                                         in Cardiff, with investment volumes
Take-up reached 703,900 sq ft by year
                                             Technology, Media and Telecoms
                                             occupiers continue to grow a presence
                                                                                        £25.00 per sq ft             £289m / +170%                 reaching £289m by year end. This total       reflecting an initial yield of 6.25%. Due to
end, this total being 38% above the                                                                                                                not only reflects close to a threefold       complete in Q3 2018, the 148,000 sq ft
                                             in Cardiff. The sector represents 18%                                                                                                              building is already fully let to Hugh James
10-year average and the highest total                                                                                                              increase when compared to 2016, but
                                             of the total deal count in 2017, albeit                                 % OF DOMESTIC INVESTORS                                                    Solicitors and Cardiff University.
on record.                                                                              PRIME RENT 2018 (FORECAST)                                 is also 160% ahead of the 10-year
                                             the average lease taken by this type of
                                                                                                                                                   average for the city. A total of 12 deals    Supported by the L&G deal, UK investors
The 269,200 sq ft pre-let of 6 Central       occupier was less than 3,000 sq ft.
                                                                                                                                                   were completed during the year, with         accounted for 62% of turnover during
Square to the Government Property Unit
                                             Grade A availability was 114,200 sq ft                                                                significantly, three exceeding £50m.         the year up from 21% in 2016. Other
(GPU) was the largest transaction of
                                             at the close of 2017, reflecting a 38%                                                                                                             domestic deals include the acquisition
2017 and the largest on record for Wales.
The GPU took a 20-year lease at the
                                             reduction since the turn of the year.      £25.00 per sq ft                      62%
                                                                                                                                                   The largest investment transaction
                                                                                                                                                   followed the announcement that the
                                                                                                                                                                                                of No.2 Capital Quarter by Tesco
                                             Looking ahead, the development                                                                                                                     Pension Fund for £23.2m and the sale
Rightacres and Legal & General scheme                                                                                                              UK Government had agreed a pre-let
                                             pipeline remains strong with 733,200                                        PRIME YIELD 2017                                                       of 1 Fusion Point to Fidelity UK for £8.9m.
which will, once completed, be a new                                                         TAKE-UP 2017                                          at 6 Central Square. Legal & General
                                             sq ft recorded as under construction                                                                                                               Overseas money represented 37% of
headquarters for HMRC. Occupation is                                                                                                               is forward funding the development
                                             at year-end. The majority of this new                                                                                                              investment volumes.
expected in 2020.                                                                                                                                  with the purchase price of £117.2m
                                             space has already been leased however,
                                                                                                                                                   representing the largest single asset        Prime office yields hardened by 25bps
Unsurprisingly, the public sector            with only 168,200 sq ft still available
                                                                                                                                                   investment deal in Wales on record.          in 2017, finishing the year in the region
accounted for 56% of total space leased.
Aside from the GPU pre-let, Cardiff
                                             split across JR Smarts Number 3 & 4
                                             Capital Quarter. Practical completion at    703,900 sq ft                      5.50%                  Rightacres Property in partnership with      of 5.50%. The spread between prime
                                                                                            Y-on-Y change +3%                                      L&G and Cardiff Council are developing       and good secondary has also continued
University also took space at the Central    Number 3 is expected by Q2 2018 with
                                                                                                                                                   the site, with completion scheduled for      to close as interest toward asset
Square regeneration scheme. The              Number 4 due to complete in Q4 2018.                                    PRIME YIELD 2018 (FORECAST)                                                management opportunities has
                                                                                            GRADE A SUPPLY                                         late 2019.
University took a 44,500 sq ft, 20-year      Further ahead, JR Smarts, John Street                                                                                                              been sustained. Yields on good
lease to accommodate plans to move           development at Callaghan Square has                                                                   The 12 acre mixed use Central Square         secondary stock were between 8%
the School for Journalism, Media and         been submitted for planning approval.                                                                 development was also the subject of          and 9% at the end of 2017.
Cultural Studies to 2 Central Square in      The scheme includes two buildings                                                                     the two other £50m plus transactions.
September 2018. In addition, Cardiff and     that will provide a combined total of       114,200 sq ft                                             In Q3, Aerium Finance Ltd acquired One
Vale College leased 54,000 sq ft at One      300,000 sq ft.                                Y-on-Y change -38%               5.50%                  Central Square for £51m reflecting a yield

18                                                                                                                                                                                                                                       19
UK REGIONAL CITIES REVIEW 2018

EDINBURGH
OCCUPIER MARKET                                   in H1 2018, with both deals further evidence
                                                  of Edinburgh’s continued status as a hub for
                                                                                                           PRIME RENT 2017          INVESTMENT VOLUMES 2017
                                                                                                                                                                   INVESTMENT MARKET                              sq ft property up for sale in September
                                                                                                                                                                                                                  2016. The eventual sale reflected a yield
Occupier interest in Edinburgh held firm          the financial services.                                                                                          Total investment volumes exceeded              of 6.3%.
despite several political distractions in 2017.
A total of 781,900 sq ft was transacted in
                                                  In fact, occupiers that fall under the Finance,                                                £                 £400m for the second consecutive year
                                                                                                                                                                   in Edinburgh reaching £411m by year-
                                                                                                                                                                                                                  The Saltire Court acquisition provides
                                                                                                                                                                                                                  further evidence of the continued
the city centre across the year, 32% above
                                                  Banking and Insurance umbrella were
                                                  responsible for the highest percentage
                                                                                                       £33.50 per sq ft              £411m / -8%                   end. Although this represents a small          strength of overseas interest. In fact,
the 10-year average and the highest total                                                                   (2016-2017) +2%                                        decrease from 2016, the 2017 total is          overseas buyers were responsible for
                                                  of space let in the city centre, 30%. This
recorded since 2003. In the wider Edinburgh                                                                                                                        63% above the 10-year average for the          four of the seven transactions over
                                                  represents a sharp increase when compared                                         % OF DOMESTIC INVESTORS
market, office take-up levels exceed 1m sq                                                             PRIME RENT 2018 (FORECAST)                                  city. Interestingly, the actual number of      £25m. Other notable acquisitions in 2017
ft for the first time since 2004.                 to 2016, when the sector accounted for just                                                                      transactions completed was at the lowest
                                                  8% of take-up. The Public sector accounted                                                                                                                      include, the sale of Exchange Place 1
                                                                                                                                                                   for five years. Even so, seven assets with
The pre-let of 181,300 sq ft by the               for 25% of take-up, with the GPU pre-                                                                                                                           to GLL Real Estate for £47m reflecting
                                                                                                                                                                   a price tag over £25m were traded during
Government Property Unit (GPU) at New                                                                                                                                                                             a yield of 5.57% and the acquisition of
                                                  let added to by a small lease to Scottish                                                                        the year, the highest number at this price
Waverley Place underpinned the take-                                                                                                                                                                              Exchange Place 2&3 by an overseas
up increase in 2017. Notably, this is the
                                                  Ministers at Roseberry House. The continued
                                                  strength of activity from Technology, Media
                                                                                                       £34.50 per sq ft                      54%
                                                                                                                                                                   level since 2006.
                                                                                                                                                                                                                  client of HSBC for £36m. In total,
                                                                                                            (2017-2018) +3%                                                                                       overseas capital accounted for 46% of
largest single occupier deal completed in                                                                                                                          The acquisition of New Waverley for a
                                                  or Telecoms occupiers was also notable.
Edinburgh for 20 years. Works on the office                                                                                             PRIME YIELD 2017           purchase price exceeding £100m by Legal        investment volumes in 2017. Supported
                                                  The sector represented 21% of transacted             CITY CENTRE TAKE-UP 2017
development are ongoing with completion                                                                                                                            and General was the largest investment         by the New Waverley acquisition,
                                                  city centre space in 2017.
scheduled for summer 2019.                                                                                                                                         transaction of 2017 and indeed,                domestic money accounted for 54%
                                                  Despite reaching a three year high in Q2,                                                                        represents the largest single office sale in   of investment in 2017.
Interestingly, the three largest deals of 2017
                                                  Grade A availability in the city centre reduced                                                                  Edinburgh on record. The Grade A office
were all pre-let agreements, demonstrating                                                                                                                                                                        Prime office yields came under pressure
                                                                                                                                                                   development is expected to complete in
the strength of demand for the best quality
space. Following the GPU agreement,
                                                  back to 266,900 sq ft by year end, broadly
                                                  the same as 2016. This level is 15% below             781,900 sq ft                      5.25%                   June 2019 and will include HMRC, which
                                                                                                                                                                                                                  at the end of 2017, finishing the year
                                                                                                                                                                                                                  in the region of 5.00%-5.25%. Prime
                                                                                                          Y-on-Y change +34%                                       will run one of their 13 regional centres
Aberdeen Standard agreed terms on a               the long-term average. The development                                                                                                                          asset opportunities have become scarce
                                                  pipeline remains limited with only 396,000                                                                       from the development, under the terms of
69,000 sq ft pre-let at 10 George Street.                                                             CITY CENTRE GRADE A SUPPLY    PRIME YIELD 2018 (FORECAST)*                                                  however, and this has meant that interest
                                                  sq ft under construction. Of this total,                                                                         a 25-year lease.
Prior to occupation, landlord Sampension                                                                                                                                                                          in the Grade B market has grown, with
will undertake a major refurbishment of the       216,000 sq ft is speculative. Significantly, just                                                                The sale of Saltire Court to Al Rashed &       yields hardening significantly. For 2018,
building. The other saw State Street secure       95,500 sq ft of speculative space is due to                                                                      Sons Group for £71m was the second             the increasingly competitive marketplace
65,600 sq ft at Quartermile 3. The financial      complete within the next two years meaning                                                                       largest transaction of 2017. The asset was     could see yields sharpen further, with
services firm has taken the top five floors of    competition for better quality space will             266,900 sq ft                                              bought from the Abu Dhabi Investment           both UK and international buyers vying
the M&G development. Occupation will be           intensify supporting rental growth.                      Y-on-Y change 0%                5.00%                   Authority who had initially put the 180,000    for opportunities.
                                                                                                                                             * Quarter 1

20                                                                                                                                                                                                                                                        21
UK REGIONAL CITIES REVIEW 2018

DEVELOPMENT
PIPELINE 2018-2020                                                     GLASGOW

                                                                       257k
                                                                       SQ FT                EDINBURGH
                                                                                                                                                    ABERDEEN

                                                                                                                                                        0
                                                                                            396k                                                     SQ FT
                                                                                            SQ FT

     KEY
           TOTAL SPACE
                                                                                                NEWCASTLE

           LET                                                                                 107k
                                                                                                 SQ FT
                                                          MANCHESTER
           SPECULATIVE
                                                          619k
                                                           SQ FT
                                                                                    LEEDS

                                             BIRMINGHAM                            916k
                                                                                   SQ FT
                         CARDIFF             1.63m
                         733k                 SQ FT
                         SQ FT
                                                                       SHEFFIELD

                                                                       221k
                                                                       SQ FT
                                   BRISTOL

                                   190k
                                   SQ FT                                                                                                                           Combined
                                                                                                                                                                  regional total
                                                                                                                                                                     (2018-2020)

                                                                                                                                                                5.0msq ft
                                                                                                                                  2018                                   2019                                      2020

                                                                                                                       2.7msq ft 1.4msq ft 0.9msq ft
                                                                                                                   The statistics on this page represent office space known to be under construction with a delivery date before year-end 2020.
                                                                                                                                                 Both new and comprehensive refurbishment schemes are included in the development pipeline.

22                                                                                                                                                                                                                                     23
UK REGIONAL CITIES REVIEW 2018

GLASGOW
OCCUPIER MARKET                                an active market participant. The sector
                                               accounted for 18% of take-up in 2017, a
                                                                                                     PRIME RENT 2017           INVESTMENT VOLUMES 2017
                                                                                                                                                             INVESTMENT MARKET                           and Mackay, Scottish Ministers, Mott
                                                                                                                                                                                                         Macdonald and Wood Group.
With letting activity picking up in the        percentage consistent with the long-term                                                                      The sustained strength of the
second half of the year, city centre take-up   average. The 40,850 sq ft lease agreed by
                                               the Student Loans Company at the Europa
                                                                                                                                          £                  occupational market, combined with
                                                                                                                                                                                                         The £65.5m purchase of HFD Groups 122
                                                                                                                                                                                                         Waterloo Street by Knight Frank IM on
reached 633,700 sq ft. Although this total                                                                                                                   favourable pricing and the weakening
represents a marginal decrease from 2016,      Building was the largest transaction to           £29.50 per sq ft              £453m / +313%                 prospect of an imminent second Scottish
                                                                                                                                                                                                         behalf of a Korean consortium was the
                                                                                                                                                                                                         second largest deal of the year. Upon its
the 2017 total is 19% above the 10-year        complete. Other notable deals included,                (2016-2017) 0%                                         independence vote served to fuel            completion in 2018, the building will be the
average, a statistic that demonstrates the     JP Morgan taking a total of 29,000 sq ft                                                                      investment appetite in Glasgow in 2017.     new headquarters of Morgan Stanley. The
                                                                                                 PRIME RENT 2018 (FORECAST)    % OF DOMESTIC INVESTORS
continued strength of occupier demand.         across two deals at 141 Bothwell Street                                                                       Investment volumes registered a four-       deal reflects an initial yield of 5.6%. Other
                                               and Zurich Insurance leasing 17,250 sq ft                                                                     fold increase when compared to 2016 to      notable deals to complete include the
Public Sector occupiers proved
                                               at St Vincent Plaza.                                                                                          reach £453m by year end. This total is      purchase of the mixed use, 48 St Vincent
a significant source of demand in
                                                                                                                                                             117% ahead of the 10-year average for       St by PonteGadea for £48.5m and Wirefox
2017 accounting for 31% of space               New Grade A availability fell to 61,000
                                                                                                                                                             the city and represents the highest level
transacted, up from 8% in 2016. The
biggest deal of the year saw Moorfield
                                               sq ft by the close of 2017, 78% below
                                               the 5-year average for the city. The
                                                                                                 £31.00 per sq ft                       43%                  of investment since 2006.
                                                                                                                                                                                                         Investments buying both 60 York Street for
                                                                                                                                                                                                         £43.5m and City Park for £41m.
                                                                                                      (2017-2018) +5%
Group and Resonance Capital secure             development pipeline remains limited,                                                                         The second half of 2017 in particular       Similar to 2016, overseas money
the Department of Work and Pensions            with only 257,000 sq ft of speculative                                              PRIME YIELD 2017          registered a sharp increase in activity,
                                                                                                 CITY CENTRE TAKE-UP 2017                                                                                accounted for the largest percentage
(DWP) as a long term tenant at 1 Atlantic      space under construction at year end.                                                                         with 82% of investment committed            of office investment in Glasgow during
Quay. The government department                Significantly, this comprises entirely of                                                                     during the final six months of the year.    2017, 47%. In fact international buyers
agreed terms for a 15-year lease on            comprehensive refurbishment schemes.                                                                          Significantly, during this period, six      were responsible for the three largest
84,500 sq ft. In addition, the Scottish        This means that, given average build                                                                          transactions with a price tag above         deals of the year. It was the return of UK
Courts & Tribunals service agreed to           times, Glasgow will not see any new space           633,700 sq ft                      5.50%                  £25m were completed.                        buyers however, that supported the sharp
take a 25-year lease on 80,000 sq ft at 3      until 2020 at the earliest.                           Y-on-Y change -8%                                                                                   increase in investor activity. UK buyers
                                                                                                                                                             The acquisition of St Vincent Plaza by
Atlantic Quay. Occupation is expected                                                                                                                                                                    completed 13 of 23 deals, up from just two
                                               Prime rents remained at £29.50 per sq ft in                                     PRIME YIELD 2018 (FORECAST)   US firm Starwood Capital for £73m was
in late 2018 following the completion                                                         NEW CITY CENTRE GRADE A SUPPLY                                                                             in 2016. Domestic money accounted for
                                               Glasgow, unchanged for two years. Given                                                                       the largest office transaction in 2017.
of refurbishment works. Interestingly,                                                                                                                                                                   43% of investment volumes in 2017.
                                               the low supply environment, 2018 is likely                                                                    The sale of the 172,300 sq ft property
Legal & General have since acquired the
                                               to be characterised by greater competition                                                                    completed following Zurich Insurance        Despite the increase in activity, prime
building (No3) for £50m.
                                               for the better quality space. As such, rents                                                                  agreeing terms on a 17,250 sq ft            yields remained at 5.50% in 2017, although
Glasgow’s traditional demand base              are expected to breach the £30 mark                  61,026 sq ft                                             10-year lease commencing Q2 2018.           exceptional prime buildings would be
however, the Financial Services, remained      within the next 12 months.                            Y-on-Y change -51%               5.25%                  Other tenants include KPMG, Whyte           expected to trade below this level.

24                                                                                                                                                                                                                                                25
Permission for the use of this image has been approved by Atkins
                                                                                                                                                                                      UK REGIONAL CITIES REVIEW 2018

LEEDS
OCCUPIER MARKET                                                    Sovereign House as the year was
                                                                   finishing. The building is the former home
                                                                                                                     PRIME RENT 2017          INVESTMENT VOLUMES 2017
                                                                                                                                                                            INVESTMENT MARKET                            from Sterling Capitol, with the sale price
                                                                                                                                                                                                                         reflecting net initial yield of 8.9%. In July,
For the first time on record, office take-                         of Addleshaw Goddard who moved to                                                                        A lack of available stock at the upper end   Schroders UK Real Estate Fund, through
up in Leeds passed the 1m sq ft mark in                            Bruntwood’s 3 Sovereign Square in one
                                                                   of the largest deals in the city in 2016.
                                                                                                                                                         £                  of the market rather than low investor       Regional Office Unit Trust bought the
2017. This total is more than double the                                                                                                                                    appetite served to limit investment          freehold of 1 East Parade and 8 St Pauls
amount registered in 2016 and is 88%                               Earlier in the year, Burberry took 46,000
                                                                                                                 £30.00 per sq ft             £127m / -27%                  volumes in 2017. Although overall deal       Street for £12.7m reflecting a net initial
ahead of the 10-year annual average for                                                                               (2016-2017) +9%                                       number was up when compared to 2016,
                                                                   sq ft at 6 Queen Street on a 10-year                                                                                                                  yield of 6.75%.
the city.                                                                                                                                                                   an example of an office sale above £25m
                                                                   lease. The deal was of major significance                                  % OF DOMESTIC INVESTORS
                                                                                                                 PRIME RENT 2018 (FORECAST)                                 was absent from the year. This meant         In contrast to the previous year, domestic
Leeds was another of the major                                     to the Leeds market with £30 per sq ft
                                                                                                                                                                            that investment volumes reached only         money accounted for the majority of
regional cities to accommodate a major                             being agreed. Prime rents in the city have
                                                                                                                                                                            £127m, 25% below the 10-year average         investment in 2017, 47%. Nonetheless,
requirement from the Government                                    now shifted upward on the back of
                                                                                                                                                                            for the city.                                international interest remain strong, with
Property Unit (GPU). In September, the                             this transaction.
                                                                                                                                                                                                                         overseas buyers accounting for 40% of
GPU on behalf of HMRC and the Cabinet
Office agreed terms for a 25-year lease
                                                                   Underpinned by the GPU, the public            £30.00 per sq ft                      47%
                                                                                                                                                                            The acquisition of 9 Bond Court by a
                                                                                                                                                                            confidential purchaser for £24.5m was
                                                                                                                                                                                                                         investment volumes.
                                                                   sector accounted for the highest                   (2017-2018) 0%
on 378,000 sq ft at 7-8 Wellington Place.                                                                                                                                   the largest office sale in 2017. Bought      Prime city core yields remained
                                                                   percentage of take-up in 2017, 39%.
This is the biggest ever commercial                                                                                                               PRIME YIELD 2017          from Legal and General, the 66,000           unchanged at 5.25% in 2017. At this
                                                                   Occupiers from a Technology, Media or         CITY CENTRE TAKE-UP 2017
property letting in Leeds. NHS Digital                                                                                                                                      sq ft building is multi let with Redmayne    level, prime yields are 50 basis points
                                                                   Telecoms (TMT) background continue
will also relocate to the new office, with                                                                                                                                  & Bentley LLP, Knight Frank and              above the market peak of 4.75%
                                                                   to have a significant influence on market
occupation scheduled for 2020.                                                                                                                                              Stewarts Law, the principal tenants.
                                                                   activity. The TMT sector accounted for                                                                                                                recorded in 2007. Given the strong
Whilst the GPU letting has attracted the                           16% of take-up during the year, with new                                                                 In March, JPMorgan Chase acquired the        interest and limited availability of prime
majority of market attention, occupier                             deals to Sky (25,700 sq ft) and Tech Hub            1m sq ft                      5.25%                  freehold interest of Toronto Square from     opportunities however, should the best
activity was strong across all sectors.                            (19,600 sq ft) the largest to complete.          Y-on-Y change +133%                                     M&G Real Estate Ltd for £22.2m. Tenants      buildings come to market, a sharper
Significantly, three deals above 40,000                                                                                                                                     of the 88,000 sq ft property include         yield would be expected. For secondary
                                                                   Prime headline rents increased by                                          PRIME YIELD 2018 (FORECAST)
sq ft were completed during the year,                                                                           CITY CENTRE GRADE A SUPPLY                                  CBRE Ltd, Capsticks Solicitors LLP and       assets, refurbishment opportunities
                                                                   9% during 2017 to £30.00 per sq ft.
a feature of the market that was absent                                                                                                                                     Towry Services Ltd.                          remained highly sought in order to re-
                                                                   This movement re-establishes the gap
from 2016.                                                                                                                                                                                                               institutionalise assets and thus make
                                                                   between good quality secondary and                                                                       Other notable deals to complete in
In a deal that will enable a move from                             prime space, with rents on good quality                                                                  2017 include the sale of five buildings      a profit. Yields for good quality, well
Albion Place, Leeds Building Society                               secondary space having increased to £26        324,000 sq ft                                             at Capitol Park to Squarestone Growth        located secondary stock ranged between
took control of the 80,600 sq ft                                   per sq ft in 2017.                                Y-on-Y change -27%              5.00%                  for £18.2m. The properties were bought       6.50% and 7.50% at year end.

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UK REGIONAL CITIES REVIEW 2018

MANCHESTER
OCCUPIER MARKET                                   provides circa 100,000 sq ft of office space
                                                  and 148,000 sq ft of retail.
                                                                                                      PRIME RENT 2017          INVESTMENT VOLUMES 2017
                                                                                                                                                             INVESTMENT MARKET                             £105m. The 165,000 sq ft office built by
                                                                                                                                                                                                           Ask Developments, Carillion and Tristan
Leasing activity increased by 50% in the                                                                                                                     Although the number of office investment      Capital Partners is the headquarters of
second half of 2017, to push total office
take-up in Manchester well above 1m
                                                  Manchester also became the first city
                                                  outside of London to see WeWork                                                         £                  transactions completed in 2017 was            Swinton Insurance.
                                                                                                                                                             broadly in line with 2016 (33), investment
sq ft for the fourth consecutive year. A
                                                  establish an operational hub. The co-
                                                  working provider took 55,800 sq ft at           £34.00 per sq ft             £917m / +48%                  volumes increased by 48% to reach
                                                                                                                                                                                                           A notable change in 2017 has been
                                                                                                                                                                                                           the source of capital investing into
total of 1.2m sq ft was let during                                                                     (2016-2017) 0%                                        £917m by year-end. This total represents
                                                  No.1 Spinningfields in June 2017 and
2017, 13% above the 10-year average                                                                                                                                                                        Manchester offices. UK institutions
                                                  quickly secured a further 44,000 sq ft at                                                                  the highest since the record year of 2014
for the city.                                                                                     PRIME RENT 2018 (FORECAST)   % OF DOMESTIC INVESTORS                                                     have returned to the market in number,
                                                  One St Peters Square in Q3. A third site is                                                                and is 93% above the 10-year average
                                                  reportedly now being sought.                                                                               for the city.                                 representing 76% of investment during
After several years of relative inactivity, the
                                                                                                                                                                                                           the year. In contrast, direct overseas
Public Sector proved a significant source         For the first time, Technology, Media                                                                      Supporting the increase were three            investment accounted for just 8%, down
of occupier demand in 2017. The 77,450            and Telecoms (TMT) occupiers were the                                                                      transactions with a sale price exceeding      from 70% in 2016. Interestingly, UK
sq ft lease taken by the Department of
Work and Pensions (DWP) at Two St
                                                  most active business group. The sector
                                                  accounted for one third of all deals and
                                                                                                  £37.00 per sq ft                      91%
                                                                                                                                                             £100m. The acquisition of No.1
                                                                                                                                                             Spinningfields for £203m by Schroders
                                                                                                                                                                                                           buyers were responsible for all of the five
Peters Square in Q3 was the largest                                                                    (2017-2018) +9%                                                                                     acquisitions over £50m in 2017, albeit
                                                  29% of space let. Firms from the                                                                           was the largest investment transaction of
transaction to complete during the year.          Professional Services remained active in                                         PRIME YIELD 2017                                                        international capital would have formed
                                                                                                  CITY CENTRE TAKE-UP 2017                                   2017 and indeed, represents the largest
DWP are expected to take occupancy                Manchester, with the sector accounting                                                                                                                   part of the purchasing fund.
in March 2018, joining Ernst & Young                                                                                                                         single asset sale in the region on record.
                                                  for 25% of take-up in 2017.
and Distrelec as tenants in the building.                                                                                                                    The 300,000 sq ft tower is home to PWC,       Prime office yields have hardened by
Furthermore, the Government Property              Grade A availability increased to 306,500                                                                  Squire Patton Bogg and now co-working         25bps in 2017, finishing the year in
Unit continues to search for 200,000              sq ft in 2017, driven by two occupiers                                                                     provider WeWork.                              the region of 4.75%- 5.00%. Prime
sq ft which may which may ultimately              releasing space as part of a consolidation.         1.2m sq ft                      5.00%                  In September, Aviva Investors agreed          refurbished yields have also sharpened,
rise to 900,000 sq ft. New Bailey is likely       Nonetheless, this total represents less             Y-on-Y change -7%
                                                                                                                                                             to forward fund the construction of Two       dipping to 5.50% from 6.25% (2016),
to be selected for the initial phase.             than 12 months of supply based on the
                                                                                                                                                             New Bailey for £108m. The development,        reflective of pent up investor demand
                                                  typical annual rate of Grade A take-up.        CITY CENTRE GRADE A SUPPLY    PRIME YIELD 2018 (FORECAST)
In Q3, Clyde and Co expanded its                                                                                                                             once built, will offer 188,500 sq ft of net   and a lack of city centre stock. In 2018,
                                                  The development pipeline is scheduled to
presence at Manchester’s Royal Exchange           deliver a further 552,000 sq ft to market                                                                  space across 10 floors. Completion is         the relative lack of buying opportunities
taking 69,000 sq ft across 6 floors. The          over the next 2 years. Given the sustained                                                                 scheduled for Q2 2019. The other £100m        combined with a sustained level of
new lease follows the firm taking an initial      level of demand for high quality space in                                                                  plus sale was the acquisition of 101          investment seeking deployment in
11,000 sq ft in 2015. The law firm have the       Manchester, the majority of this will be         306,500 sq ft                                             Embankment by an M&G Real Estate              Manchester will continue to apply upward
largest occupation at the building, which         leased prior to practical completion.              Y-on-Y change +39%               4.75%                  led consortium. The purchase price was        pressure on pricing.

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UK REGIONAL CITIES REVIEW 2018

NEWCASTLE
OCCUPIER MARKET                                The second biggest office letting of the
                                               year however, was the 19,000 sq ft lease
                                                                                                 PRIME RENT 2017          INVESTMENT VOLUMES 2017
                                                                                                                                                        INVESTMENT MARKET                           Notably, the deal reflected a net initial
                                                                                                                                                                                                    yield of 5.57%, a record low for the city.
Although office take-up in Newcastle city      taken by Frank Recruitment Group at the                                                                  Following a relatively strong 2016 in
centre registered a 19% decrease in 2017,
a more positive market tone was evident
                                               St Nicholas Building. The firm agreed
                                               terms on an 11-year lease with the space
                                                                                                                                     £                  terms of trading activity, the reluctance
                                                                                                                                                                                                    Maya Capital LLP extended their
                                                                                                                                                                                                    portfolio in the North East in September,
                                                                                                                                                        of landlords to bring assets to market
as the year ended. A total of 177,900 sq ft    split over two floors. Sir Robert McAlpine    £23.50 per sq ft              £50m / -72%                  in the absence of suitable alternative
                                                                                                                                                                                                    with the acquisition of Bede House at
                                                                                                                                                                                                    All Saints Business Park for £4m. The
was transacted during the year, with the       Ltd and the National Audit Office are also         (2016-2017) +2%                                       opportunities meant overall volumes
number of deals broadly similar to 2016.       tenants in the buildings.                                                                                                                            38,000 sq ft property is multi-let, with
                                                                                                                                                        suffered. Investment turnover for
Encouragingly, both the level of enquiries                                                   PRIME RENT 2018 (FORECAST)   % OF DOMESTIC INVESTORS                                                   tenants including Wealth Management
                                               The Professional Services accounted                                                                      the year reached £50m, 49% below
and number of viewings increased as the                                                                                                                                                             Systems Ltd, Turner & Townsend
                                               for the largest percentage of let space                                                                  the 10-year average for the city.
year progressed, suggesting a strong start                                                                                                                                                          Group Ltd, Ingeus UK Ltd, and London
                                               in 2017, 30%. Representation from                                                                        Interestingly, actual deal number was
to 2018.                                                                                                                                                                                            & Country Mortgages. Assets already
                                               Technology Media or Telecoms occupiers                                                                   up when compared to 2016, but it was
                                                                                                                                                                                                    owned by Maya Capital include, units
The 21,300 sq ft lease at 2 St James Gate                                                                                                               the absence of higher value sales that
taken by Eldon Insurance was the largest
                                               however, continues to grow. The sector
                                               accounted for 28% of take-up, with Trinity
                                                                                             £24.00 per sq ft                      87%                  meant investment volumes remained           9 and 15b&c at Cobalt Business Park,
city centre transaction to complete in 2017.                                                      (2017-2018) +2%
                                                                                                                                                        below the long-term trend.                  both bought in 2015.
                                               Mirror North East (12,500 sq ft) and The
Eldon Insurance relocated from Cale Cross      Communicator Corporation Ltd (5,700                                            PRIME YIELD 2017                                                      In a year of few transactions, domestic
                                                                                             CITY CENTRE TAKE-UP 2017                                   Arising from the all issued share
House, which was home for the company          sq ft) notable firms to take new space                                                                                                               money continued to dominate activity.
                                                                                                                                                        purchase of SM Newcastle, the
for 10 years. Other tenants at St James        in 2017.                                                                                                                                             UK buyers accounted for 87% of
                                                                                                                                                        acquisition of 1-3 St James Gate by
Gate include, the Big Lottery Fund, WYG
                                                                                                                                                        Palace Capital PLC for £20m was the         investment in 2017. The only sale to an
Group Ltd, UBS and Listening Company           Whilst fluctuating during the year, Grade
                                               A availability finished 2017 at 175,000                                                                  only sale to complete over £10m in          international buyer was the acquisition
Ltd. Subsequent to the letting, the property
has been acquired by Palace Capital.           sq ft. This total is 15% below the 10-year     177,900 sq ft                      5.75%                  2017. The mixed use development             of Maybrook House to Chinese firm
                                               average, but more notably none of this            Y-on-Y change -19%                                     comprises of a 61,000 sq ft office and      TusPark for £5.65m.
Demand for flexible office solutions                                                                                                                    two retail units. The purchase price
                                               is made up by new buildings. Supply will                                                                                                             Following the Keel Row House sale,
continues to be a feature of the market and                                                 CITY CENTRE GRADE A SUPPLY    PRIME YIELD 2018 (FORECAST)   reflected a net initial yield of 8.6%.
                                               therefore come under increased pressure                                                                                                              prime yields moved to 5.75%. At this
has meant that Citibase took further space,
                                               in the coming 12 months, with the                                                                                                                    level, prime yields are 100 basis points
acquiring 13,100 sq ft at the Broadacre                                                                                                                 In August, Watkin Jones Group, via
                                               development of 107,000 sq ft at Science
House. Newcastle City Centre is also                                                                                                                    their SPV Planehouse Ltd purchased          above the market peak of 4.75%
                                               Central not due until H2 2019.
rapidly becoming a target city for co-                                                                                                                  Keel Row House from Aviva Investors         recorded in 2007. Yields for good
working operators looking to benefit from      Prime headline rent increased by 2% in         175,000 sq ft                                             for £8.85m. The 23,794 sq ft property       quality, well located secondary stock
the burgeoning digital and tech sector.        2017 to £23.50 per sq ft.                         Y-on-Y change +1%               5.75%                  is fully let to Ward Hadaway until 2030.    were around 8.25% at year end.

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