Contact Us

If UK Regional Office Rents Are Rising, Why Don't Investors Want Them?


If the UK regional office market is so promising, why are investors so cautious? Even rising rents and falling grade-A supply can’t tempt overseas investors who have been frightened by UK economic woes.

This is the conundrum explored by two deep dives into the UK’s regional office markets, both of which suggest reasons to be cheerful on the strength of solid performances. But both also suggest not all is not well right now.

Knight Frank’s new analysis headlined increased take-up volumes in most key cities, particularly where local demand or supply was out of balance. Aberdeen take-up surged 95% compared to 2021, with Cardiff up 87%.

Manchester led the UK cities in terms of overall leasing volumes, with 1.2M SF of office take-up in 2022, up 13% compared to 2021. Five of 10 regional cities registered a year-on-year rise in take-up during 2022.

Knight Frank said there’s yet more good news to come over the medium-term as a supply and demand imbalance for the best new floorspace widens.

Across the regions grade-A availability is at 3% of total stock at year-end, with just 3M SF of speculative floorspace due to complete over the next 36 months. Yet looming lease expiries suggest continued demand: In Birmingham 2.7M SF of floorspace is let on leases expiring by 2025, yet the new space pipeline is just 520K SF.

The imbalance is striking in every city: Edinburgh has 1M SF of lease events in prospect, but just 57K SF in the development pipeline; Leeds has 1.7M SF of lease events looming and 487K SF in the pipeline; Manchester’s figures are 2.8M SF and 682K SF, respectively.

Rents Up, That's Good News?

Birmingham's skyline

The result is steeply rising rents. Prime office rents also took a step up as occupiers sought out a scarce supply of new grade-A floorspace. Bristol recorded the highest year-on-year growth across all regional cities, with prime office rents rising 12% over 2022 to £42.50 per SF.

Since March 2020 eight out of 10 regional markets have now registered an uplift in prime rent stimulated by an aggregated vacancy rate for the 10 UK regional cities that stood at 9.8% at the end of 2022. This is a modest uplift on the 8.9% recorded at the end of 2021. 

Knight Frank blamed the increased vacancy rate on the return to the market of a slew of poor quality older offices as occupiers upgrade.

Surely this ought to tempt investors? Apparently not. Knight Frank data and separate research from Lambert Smith Hampton suggested the opposite.

In Manchester, where occupancy is booming, the volume of office investment transactions is down 37%, with yields up 100 basis points to 5.75% and predicted to rise. Birmingham is the exception as transaction levels climb off the floor to £387M but the yield curve points remorselessly in the same direction.

Investment volumes across all UK regional cities reached £1.74B in 2022, 20% lower than in 2021, with the suggestion that the thin pipeline of new grade-A floorspace was holding the investment market back. And yet this is the same grade-A market that has been performing well in the occupational market.

Overseas Investors Turn Shy

The City of London skyline

Lambert Smith Hampton’s analysis suggested some potential answers. It showed the UK out of favour with international money, with overseas capital inflows down by 54% quarter-on-quarter as the year ended. Those regions that enjoyed most overseas investment over the last few years were those with the largest drop in investor demand.

London was the most conspicuous example, slumping to £2.1B, a mighty 58% down on the five-year average and amounting to just one-third of UK investment. The last time that happened was 15 years ago. 

The north west, focused on Manchester, was sharply down, likewise the east Midlands, south west and Yorkshire, where international logistics property investors had been conspicuously active.

The regions that did best at winning investors had a disproportionate interest in build-to-rent residential. This explains the West Midlands' almost unchanged performance.