There are signs of growing activity in the regional commercial property market as the economy improves and investors look beyond the capital in search of higher yields.
Demand for prime London property has pushed prices for office space so high that returns are becoming unattractive.In the financial district yields peaked at 6.7 per cent in 2009 but have since fallen to last month’s figure of 4.75 per cent.
In contrast, regional yields currently stand at 5.75 per cent boosting investment in locations like Birmingham, Manchester Edinburgh and Leeds. Overall, deals outside London have accounted for around 50 per cent of total investment in the year to date.
And this investment is not confined to the regional business centres. While the picture is patchy, and some locations are performing better than others, greater confidence is boosting investment elsewhere. For example, in recent months, property fund manager Benson Elliot has acquired assets in both Preston and Cambridge.
This trend looks set to continue as the economic recovery gathers pace and demand increases. During the recession office vacancy rates climbed from 7.1 per cent in 2007 to 15.8 per cent in 2009. Today they are falling, with Savills forecasting a vacancy rate of 11.5 per cent next year.
Increased competition is also likely in the regions. Unlike London, where commercial development weathered the recession to some degree, construction ground to a halt in many areas. This was particularly the case with speculative development. Consequently an undersupply of office space is forecast until there is an upturn in projects breaking ground.
Despite the optimism returning to the regional markets, it is true that the recovery is stronger in some areas than it is in others. For this reason investors need to exercise caution and assess occupancy levels, tenant reliability and the state of the local economy before committing to a deal.
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