Member Article

New take-up figures boost Leeds office market

Leeds’ office market has had one of its strongest six month periods on record with a total of 436,853 sq ft let during the first half of 2013, which is more than the annual totals for the last five years according to new research from property firm CBRE.

CBRE’s Leeds H1 Office Marketview credits strong interest in well located, Grade A space as the catalyst for three large lettings which have boosted take-up this year. Yorkshire Building Society’s acquisition of 76,400 sq ft at Broad Gate together with a deal to CapGemini (25,400 sq ft) and two smaller lettings, means there is now less than 30,000 sq ft remaining at Highcross’s iconic Headrow scheme. Take-up was further boosted by the KPMG pre-let of 61,250 sq ft at 1 Sovereign Square and Dart Group’s 73,100 sq ft deal at The Mint. Smaller transactions were still limited although enquiry levels for sub 5,000 sq ft did increase in Q2.

CBRE highlights key requirements for the second half of 2013 as Sky and In Touch, plus a number of unnamed agent-led ones. However, most of the larger requirements will now have to plan ahead and look at pre-let options if they need in excess of 30,000 sq ft as demand outstrips current supply.

Total available space is now 1.15m sq ft and has declined by 15% since the end of 2012 due to the weight of deals signed in the last six months. The majority of this decline has taken place in the Grade A / newly completed end of the market. Good quality, prime stock remains in short supply, however refurbishment has been a major feature within Leeds. There are four refurbishments on site at present at 1 Aire Street, 21 Queen Street, Yorkshire House and Minerva. Rent increases are likely to occur in this sector as it picks up slack from under supplied Grade A stock.

Prime rents increased to £25.00 per sq ft at the start of the year, led by the rent agreed by KMPG at 1 Sovereign Square. While landlords are taking a firmer stand on rents and incentives no deals on this harder line have been done as yet, CBRE expects to see rents stay at their current level for the remainder of the year. Nevertheless, incentive levels may well fall back to nearer the historic norm.

Jonathan Shires, Director of Office Agency at CBRE’s Leeds office, said; “The jump in take-up from last year is incredible and demonstrates how quickly the market can turn around when deals cross the line. The knock-on effect is that grade A office supply in Leeds continues to fall, and now is less than current named demand from occupiers in the city centre. As supply continues to fall we are seeing the hardening of incentives and quoted rents in Leeds playing more towards the landlord than the tenant for the first time since 2008. Market sentiment has undoubtedly improved over the last six months. Stock is diminishing and this is leading companies to finally commit, but only really those who acknowledge that this environment is now the new norm.”

Looking at the investment market, 2013 started slowly with limited investor appetite for central Leeds office investments. However, as the year progressed into the second quarter increased investor interest was witnessed as a result of the improving occupational picture, rental growth prospects due to the looming lack of Grade A stock and the overheating South East market.

Robin Bullas, Associate Director of Capital Markets at CBRE’s Leeds office, said; “A total of £32.85m transacted in the first half of the year, a similar total to the first half of 2012. The largest deal so far this year has been British Steel Pension Fund’s £25.25m off market forward funding of 1 Sovereign Square the new regional HQ for KPMG. This equates to a yield of 6.45%, demonstrating the downward pressure on yields for the very best assets.

“Whilst the positive occupational story is attracting investors to Leeds, good quality prime stock remains in short supply. Few buildings in Leeds provide 10 year plus income and many of the properties are too small to satisfy investor demand, particularly from overseas investors. In H2 we will continue to see increased demand from UK and overseas funds as well as UK property companies with foreign equity partners and many of these may need to revise their buying requirements in order to successfully acquire a property in central Leeds.”

CBRE states that a number of investors are now focusing on more secondary opportunities to take advantage of the attractive yields on offer. Indeed there are currently eleven secondary investments in the market with a total value of circa £94m, of which seven are under offer with a total value of £67m. In addition growing interest in out of town office opportunities is occurring.

Bullas continues; “Prospects for the remainder of 2013 and into 2014 are positive for both prime and secondary assets. With London and the South East starting to look expensive, and both Manchester and Birmingham having already seen increased investor demand, investors are starting to focus on Leeds. We expect yields to harden for both prime and secondary assets in response to increased investor demand and a shortage of supply.”

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