Why UK regional offices are in growing demand

London offices have regained their spot at the top of investors’ wish lists, and the focus is now shifting to the UK's 'Big Six' cities —Birmingham, Bristol, Edinburgh, Glasgow, Leeds, and Manchester—in search of high-quality office space.

“These regions are demonstrating significant growth and resilience, making them attractive for those seeking new investment avenues” says Simon Verrall, head of national office investment at JLL.

Strong office employment is a key driver of investment growth in these cities especially within the knowledge economy, including the professional, scientific and technology sectors, where employment is notably higher than the UK average. This has supported demand for office space and it’s filtering through to rises in prime rents, which are nearing the £50 per sq. ft milestone.

“It took 18 years for average Big Six prime rents to rise from £21 to £31 per square foot but only five years to climb from £31 to £41,” Barrie David, UK regional office research at JLL, who says this upward trend is expected to continue over the next three to five years.

There's a shift in investment patterns, too, with international capital flowing into the regional markets: “Private investors are attracted by the resilient occupational markets, strong potential returns and the rich and diverse talent pools; people are drawn to these cities for the lifestyle, affordability and great universities,” adds David.

Demand is especially high for buildings with top energy performance ratings as investors up their push towards sustainable assets. But they may find opportunities harder to come by as a significant supply gap emerges, particularly among grade A office space. Buildings with EPC ratings of A/B represent just 20 per cent of current stock but accounted for 60 per cent of take-up in 2023.

This will be further compounded by a scarcity of new development completions and major refurbishments; in 2023, new starts represented half of the 10-year average and were 61 per cent lower than expected.

“New starts in 2024 are even lower with current projects under construction only filling a fraction of the anticipated need,” adds David.

The Bank of England is beginning to moderate its base rate as inflation is now comfortably within target ranges, with stability returning to the economy and starting to lure investors back to office real estate.

The substantial increases in interest rates over the last two years have seen real estate yields shift equally substantially. Notional prime office yields in the Big Six have increased by around 200 basis points to their currently level of 6.5%.

“The current level of pricing, combined with greater confidence in the outlook, creates a really attractive entry point for potential investors, with great buildings buyable at a considerable discount to their previous values,” adds Verrall.

But investors will need to think creatively to future-proof their assets in a market that’s seen significant change in how people live and work in recent years. Already, offices are being repurposed to better serve alternative uses and, last year, such transactions accounted for 17 per cent of all deals, up from just 2 per cent in 2019.

“This avenue provides an element of risk mitigation, with residual value evident for good buildings in good locations,” Verrall adds.

Across Europe, office sector forecasts show a strong upward trend in values and returns. Verrall said: “The Big Six are at the upper end of this range and will benefit from yield compression as central banks ease interest rates, combined with the strong rental growth.

“Even under scenarios more modest than our current growth forecasts, prime offices in the Big Six will see double digit unlevered IRR's over the next five years.”

For investors ready to look beyond London, the time is now: “These regions are poised to grow their share of the UK’s real estate investment scene as buyers increasingly recognise the opportunities and deploy capital into these dynamic markets.”

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