Overseas investors follow occupiers to the regions

As the occupational market strengthens, overseas investors are looking to grow their regional presence, writes Savills’ Richard Merryweather. The UK regional markets have been active this year, and not just because of home owners taking an interest in property outside of London during the pandemic. Overseas investors have been flocking to commercial investment in the regions, particularly offices, which recorded the highest non-domestic investment in a decade, driven by the robust occupational market outside of London. Overseas investors have been actively acquiring assets in the market, with non-domestic investment reaching £2.38bn in the first half of 2021. The proportion of total investment from non-domestic investors reached 65%, which was well above the five-year average of 38%. Furthermore, the demand from overseas investors has been diversified, with both long-income and value-add opportunities being considered. So what has been driving this increased appetite for regional offices? Rising take-up Demand has been driven by the positive momentum in the regional office occupational market, which follows a difficult 2020 when lockdown restrictions resulted in limited transactional activity. Take-up reached 3.96m sq ft at the end of H1 2021 – a 10% increase from H2 2020 and 24% above H1 2020. The lack of supply and competition for the best quality office space also saw headline rents increase across the regional markets. There were notable increases in activity in Birmingham, Leeds, Glasgow and the Greater London and South East region, with each market recording an increase in take-up of more than 49% from H2 2020. Investment in these regional locations has also kept up. Greater London and the South East have recently seen the return of overseas investors in significant numbers. For example, at the end of August, Savills sold an office asset in Essex on behalf of Maya Capital to a Kuwaiti buyer. Limited stock has also been traded to international investors in the North and Midlands. Although non-domestic buyers have yet to return in significant numbers to these markets, it is only a matter of time. Ultimately, the role that UK cities play in both the national and global economy is changing post-Covid. So, while London is still one of Europe’s economic powerhouses, it is by no means the only hub of opportunity in the UK. The Savills Office FiT Survey 2021 uncovered that 55% of UK respondents would at some point prefer to work in an office that is shared by other companies/leased by their employer closer to home, rather than commuting to the company’s main office location. And 9% reported that they would use an alternative company workspace all or most of the time. The commute is a key factor in the workplace experience of the employee and so grade-A offices located in proximity to transport hubs with strong amenity provision will continue to appeal to occupiers, especially those with good links to London. Public sector regionalisation Both government and private businesses are looking to establish and grow their presence in the regions. The public sector was the most active business sector in the first half of 2021 across the regional city office market, and Greater London and the South East accounted for 20% of take-up. This is expected to remain one of the most active sectors as the government progresses its regionalisation plans. HMRC has confirmed 13 regional sites, the Cabinet Office has also outlined plans to move thousands more public sector jobs, including senior roles, out of London by 2030. The move will result in a further 20 government hubs in the regions by the end of this parliament in 2022, with Birmingham a key player in these relocations. In addition, the Department for Transport is going to open offices in Birmingham and Leeds, and the Department for Business, Energy and Industrial Strategy looking to create 175 roles in the city. Life science opportunities Appetite from investors to increase their exposure to the life science sector has also been notable in 2021, and it is expected that this will continue throughout the year. Cities such as Oxford and Cambridge where there are existing large life science clusters have done particularly well, which has led to downward pressure on yields in those markets. The supply of laboratory space is exceptionally constrained across the UK, which provides attractive rental growth opportunities. Technology and banking have also been key sectors that have been active this year, which has benefited markets such as Leeds with its established cluster of tech and creative industries. Leeds relocations continue Leeds has already attracted businesses such as the BBC, Channel 4, Amazon and HMRC to either relocate or add a Northern offering to their operations. In the case of Channel 4, it has its new national headquarters in Leeds while retaining a presence in London. It is likely other companies will follow in Channel 4’s footsteps by moving premises to Leeds during 2021. Already fashion brand Burberry has moved 300 jobs to Leeds, and HMRC moved with 6,000 employees. As the BBC prepares to move key jobs and programmes out of London, we will see many more high-profile roles relocating to the Yorkshire city. The Bank of England has also unveiled plans to open a new hub in Leeds, moving parts of the Bank from its historic home on Threadneedle Street in the heart of the City of London. To coincide with this, the government also announced plans to open a UK Infrastructure Bank in the city. With so much development, activity and opportunity in the regions, it is no wonder overseas investors are taking an active interest and growing their regional office portfolios. Richard Merryweather is joint head of UK investment at Savills