While UK offices, particularly London, remain one of the most attractive commercial property markets in the world; protracted Brexit uncertainty has hindered investment volumes this year. Buyer enquiries for the office sector fell by 11% for the quarter – the lowest reading since the eve of the referendum in Q2 2016 – according to the latest RICS market survey.
Construction – rise of the regions
Taking a longer-term view gives a more positive outlook on office property, and this is certainly a market that developers are backing massively across the country. The annual Deloitte Crane Survey paints a healthy picture, with Birmingham set to achieve a record year for office completions at 1.4m sq ft and Manchester on course for over 2m sq ft – a 37% increase on the 1.5m sq ft recorded the previous two years.
Developers and fund managers alike would undoubtedly have been buoyed by a government commitment last year to invest £600bn in infrastructure over the next ten years. The prospect of HS2 being a considerable boost for Birmingham and Manchester’s thriving skyline activity. Savvy occupiers from media and tech industries are also increasingly taking advantage of cheaper office rents and access to talent outside of London, with Channel 4 perhaps being the most high-profile of them all, opening a new HQ in Leeds next year, as well as creative hubs in Bristol and Glasgow.
Futureproofing the office
The rise of coworking and flexible office providers leasing and even purchasing office buildings has been well documented. The old adages of ‘if you build it, they will come’ and ‘location, location, location’ are less relevant to modern day office construction.
The flexibility and depth of amenities offered by the likes of WeWork has forced traditional landlords to match their offering, and they are upping their game. AXA Investment Management’s Twentytwo Bishopsgate will set a new standard for skyscrapers when complete with gym, wellness centre and an innovation hub across various floors.
It is a conundrum too for investors keen to replace tenants at any future lease break or expiry when this sea change in the office becoming a product or a service may leave their asset not meeting the needs of the market.
The end of office-to-resi?
One option, not without controversy and back in the political spotlight, is office to residential conversions under Permitted Development Rights (PDR), which were introduced in 2013 allowing developers to not require planning permission to convert an office; with some 42,000 new homes being created since.
This has cleared much secondary or even obsolete office stock from the market. However, it is arguably the less viable buildings that remain, and a slowdown in residential value growth paired with a continued uptick in office rents has made PDR a much less attractive proposition.
Across the country the appetite for refurbished/Grade A office property is almost insatiable, and this has helped lead to rental growth of 2.2% in the regions, Regional REIT mentions in its latest results. With the right asset management strategy in place, a second-hand office block still has the potential to reap dividends.