Our property and asset management partner Jonathan Marwood and Adam Fletcher, Director at ADAPT Real Estate, recently shared their thoughts on why early 2021 is a prime time for regional office investment with Family Office Magazine.
Despite chatter about the ‘death of the office’, many employees are desperate to regroup after months of homeworking, craving interaction and collaboration with colleagues that Zoom simply cannot provide. As such, offices do have a future. Rather than assuming that the returns historically offered by the UK’s office market have dried up, overseas investors and family offices should take a closer look. In certain pockets of the UK, markets are currently presenting purchasing opportunities and chances to drive returns like never before; now is the time to act.
Why the UK?
The UK has long been an attractive offer to an overseas financier seeking a home for their cash. Whilst foreign investors can often find Europe’s complex legal structure difficult to navigate (made particularly tricky for some thanks to an added language barrier), the UK boasts a transparent and well-trusted legal system. Looking beyond the EU, geopolitical developments have often lessened the appeal of overseas investment in both China and the US. With an established property hierarchy and freehold system that is a known product across the world, the UK emerges as a sensible destination for family offices to invest in. What’s more, even now, over eight months since the first national Covid-19 lockdown, it retains low vacancy rates, yields remain attractive and lease incentives have remained stable – a sense of security in this uncertain time.
Where in the UK?
Although London has historically been a sure bet for family office investment, to see real returns in 2021, investors should ‘north-shore’ and make the regions a core part of their investment strategy. Take Nottingham, Newcastle or Birmingham, for example. Occupiers can benefit from cheaper rates, rents and service charges, as well as a better quality of life and lower living costs, causing many businesses to set up regional HQs for their teams.
Public transport is also increasingly affecting investment prospects. In a Covid-19 world, getting to and from work safely is hugely important, making cities that are less reliant on crowded transport networks much more appealing to workers. Offices in cities like Manchester and Edinburgh, which already have much safer and less crowded tram systems in place, and hubs like Birmingham, which is welcoming a clean air zone next year, will become increasingly in-demand with tenants looking for a better quality of life.
Additionally, in these regional hubs, quality office supply is at an historic low. Since the relaxation of planning laws allowing permitted consent from offices to residential, poorer quality office stock has been converted to residential and student property. This leaves a reduced quantity of higher quality stock for office occupiers, driving prices up and increasing potential returns for owners.
Although occupier demand is high, some investors are currently opting to pause, holding out until we see greater global certainty in 2021. This is where a clear current opportunity exists: invest whilst there is limited competition.
Large retail and pension funds – which typically dominate regional markets, snapping up quality investments with speed and ease – are currently sitting dormant, as they too are waiting for Q1’s hoped-for certainty before moving Sterling. But, in doing so, they are leaving the door open for private investors. Now is prime time for mid-size buyers to act before a mass vaccine roll-out begins and these larger funds become active once more. Investors should secure key regional assets in their 2021 portfolios now, as there are more rewards to be reaped as the office market continues to evolve next year.
Importantly, there are opportunities to drive returns post-investment in the regions, by repositioning properties to align with our evolving expectations of the workplace in the wake of Covid-19. There has been a seismic shift in the market’s understanding of top-tier properties, or ‘Grade A stock’. In 2019, occupiers were seeking spaces with a quality design, on-site food and beverage amenities, and good transport links. Now, this has progressed to also encompass the need for an office to provide a safe haven in the context of Covid-19, as well as enhanced reasons for occupation to incentivise workers away from new-found home working rituals.
For example, improved health and safety provisions and air ventilation systems; brain storming areas that encourage collaboration with colleagues; fitness studios; increased communication infrastructure; extended cycle storage and drying facilities that allow workers to avoid public transport; electric car and scooter charging; and updated food and beverage outlets will all be key for the office occupiers of 2021 and beyond. It is those who invest a little extra next year to update their assets to reflect occupiers’ new demands that will see quicker take-up as tenants look for more ‘oven ready’ office space to move in to.
Regional investment could therefore play not just a useful but also a critical role in a family office’s Covid-19 investment strategy; but the key is to act now. Although these markets may have been traditionally viewed as ‘non-core’, occupiers are being increasingly drawn towards them. In a post-pandemic world, this trend may be accelerated as some professionals opt for a life out of the city. However, to avoid being side-lined by larger investors, it is crucial that family offices seize this opportunity before the market wakes up. Once bought and repositioned to align with new market expectations, investors should expect to reap the rewards of smart regional office investment.
This article was first published in Family Office Magazine’s Winter 2020 edition, see here. You can also find the publication on Twitter @familyofficemag.
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Hartnell Taylor Cook
5th November 2020