A lack of sellers in the market sees investment volumes fall

The coronavirus pandemic and the subsequent lockdown restrictions have resulted in investor caution in the market. This culminated in weaker transactional activity taking place in Q2 2020. Investment volumes in the regional office markets (excluding Greater London & South East) were, therefore, 36% below the long-term average.

After combining Q1 2020 and Q2 2020, investment volumes in H1 2020 were 56% below the long-term average.

The short-term investor caution arising from Covid-19 in the market, has been reflected by prime yields for regional offices moving out by 25 basis points, and they currently stand at 5%. This is, however, a 100 and 125 basis point discount when compared to City and West End prime yields, which stand at 4% and 3.75% respectively, highlighting the value the regional office market can provide.

The investor appetite for prime assets and medium- to long-term income remains strong. This was exemplified by Tesco Pension Fund acquiring Halo, Bristol for £69.4 million which was partly pre-let to Osborne Clarke who leased 74,000 sq ft at the new development. Legal & General have continued to invest in urban regeneration schemes across the regional cities and have invested £150 million in Sheffield City Council and Urbo's West Bar Square development in H1 2020.

Sale and leaseback opportunities have also proved attractive to investors who are seeking medium- to long-term income, and occupiers who are seeking capital injections. The most notable sale and leaseback transaction in H1 2020 was BA Pension Fund buying Next Headquarters in Leicester for £48 million.

Despite the weaker economic environment there are limited distressed sellers in the market, and there is currently a pricing mismatch between buyers and sellers for value-add opportunities which has resulted in limited transactional activity in this part of the market since the lockdown.

UK institutions have been the most active investor in H1 2020; they have accounted for 40% of investment volumes. This has partly been driven by Legal & General's £150 million investment in West Bar Square, Sheffield.

It's expected that throughout the rest of the year, UK institutions and overseas investors will continue to be active in the market, most notably in Q4 2020.

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_{Read the articles within Spotlight: UK Regional Office Market Report below.}