Volumes remain subdued, but investor sentiment improving
Investment activity remained relatively muted in H1 2025, with turnover reaching £1.0 billion, which reflected a 7% decrease from the same time period in 2024. There have been improved levels of sentiment from investors towards the sector, with increasing levels of liquidity evident in the market; there was a 16% increase in the number of deals recorded when compared to H1 2024. Pricing levels remain attractive to investors, with the prime regional office yield remaining at 6.75% and has remained at that level for the previous five months.
Notable transactions in Q2 included Melford Capital acquiring 101 Embankment, Manchester, for £74 million, reflecting a yield of 9.12%. This followed the investor’s recent acquisition of EQ, Bristol, for c.£100 million. Priory Real Estate purchased Baskerville House, Birmingham, for £37.7 million, reflecting a yield of 9.96%. Overseas investors have been the most active purchaser type across the region, accounting for 39% of turnover. The discounted pricing, combined with the appealing occupational market dynamics, has continued to attract non-domestic capital into the market.
It is anticipated that there will be an increase in investment volumes in the second half of the year. This expectation will be supported by the forecast base rate cuts, with Oxford Economics predicting two reductions by the end of 2025 and the robust occupational market fundamentals. Take-up recorded in H1 2025 across the combined Big Six regional cities and Greater London and South East region was the highest since 2021, and the current prime regional yield doesn’t reflect the rental growth prospects evident across the market.
Pricing remains attractive amidst robust occupational market
The disconnect in the performance of the regional office investment and occupational markets has been stark. Investment volumes for the last two years have been the lowest ever recorded. In contrast, the Big Six regional cities have delivered 5% average prime rental growth for the last two years, which was the highest level recorded in over a decade.
Pricing for office assets has been impacted by the weaker sentiment towards the sector. This has been evident for both prime and secondary assets. According to the latest MSCI monthly Capital Growth Indexes, office values in the 'Rest of South East' and 'Rest of UK' segments have declined by 39% since June 2022.
However, the pace of decline is slowing. Since the start of 2025, MSCI has reported only a 2% and 1% fall in values, respectively, suggesting that price discovery is beginning to take hold. It’s important to note that the MSCI index includes all grades of property, which has skewed reported values.
Furthermore, when compared to other asset classes, regional offices remain attractively priced. According to Savills prime commercial property equivalent yields data series, only shopping centres and leisure parks currently offer softer yields than South East and regional offices.
The prospects for continued rental growth in the occupational market are strong, with the development pipeline remaining constrained. There is only 400,000 sq ft available of new-build space being delivered across the Big Six regional cities. This trend is more acute in the Greater London and South East region, with only one new build speculative development under construction. Furthermore, supply in this market area is expected to reach its lowest level ever recorded by the end of the year.
The benefit of being a first mover after a downturn has been notable in previous economic cycles. After the global financial crisis, the prime regional office yield hardened by 125 basis points in only five months. A similar pace of yield hardening is expected given the robust occupational market fundaments; consequently, investors have a short window to capitalise on the aforementioned market dynamics at current pricing levels.
The buyer pool across the market is getting deeper, with overseas investors being the most active buyer type across the regional office market. The sources of capital have varied, with North American investors being the most active in the region, accounting for 48% of non-domestic investment in H1 2025.
When reviewing the number of assets acquired, European investors have been the most acquisitive, purchasing seven buildings. Notably, French SCPIs have continued to be active, with four different investors using this financial vehicle. There were three separate acquisitions from these investors in Scotland. This is a trend we expect to continue, given the characteristics of the regional office market appealing to these investors.
The principal requirements from this buyer type include assets with at least five years of income and a predominant return profile of above 7.00% (NIY) and a lot size between €5–25 million. The regional office market is well placed to accommodate these requirements, with 76% of lots traded in the last five years below £20 million.
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