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Office space demand/supply is opportunity for property investors

5 June 2018

Investors are cashing in on booming demand for office space as a lack of property supply drives up rents, according to Richard Peacock of Kames Capital.

Years of chronic undersupply, caused by a lack of development finance and higher development costs, has left Britain’s regions woefully short of quality office space, Peacock says, with a wave of conversion projects to change offices into apartments, student accommodation and hotels eroding supply even further.

He cites the example of Bristol where it has been calcuated just 0.5% of the city’s total office space is vacant. Likewise, less than 2% of the total floor space in major cities such as Birmingham, Cardiff, Edinburgh and Manchester is currently available for local business to rent.

At the same time, demand for office space is at its highest level in 18 years, according to Knight Frank, which is driving up rents in Britain’s regions.

Investors can cash in on this trend, says Peacock, co-manager of the £668m Kames Property Income Fund, which invests 50% of its cash in regional offices.

“The UK regional office market is diverse, where local factors impact on market fundamentals and prospects. However, there are significant national trends that have created a shortage of supply in relation to occupier demand. It is this factor above all else that is generating rental growth and driving investor sentiment towards the sector.”

While London often steals the spotlight, Peacock believes there is a bigger opportunity for investors in regional cities such as Bristol, Birmingham and Manchester where supply is tightest.

Over the past three years, regional offices have returned an average of 4.93% a year to investors, compared with 3.16% for offices in London, according to Kames Capital.

Peacock says: “Regional office markets have undergone rapid change in recent years, with increased occupier mobility and a greater focus on the quality of working environments. At the same time, investor demand for the sector is strengthening as buyers recognise the impact of these demand-side factors on markets and the shortage of supply.

“The Kames Property Income Fund has been a leader in investing into these markets. The Fund has assembled a diverse portfolio of good quality assets, located in the dominant centres across the UK and has returned 19.6% in three years. This regional office weighting has been a strong contributor to the delivery of the fund’s objectives.

“With a positive outlook for the sector, it should help the fund continue delivering performance in coming years.”