Analysis of the UK office investment volumes show that £1.3bn has been invested so far this year (to mid-March 2019) but investment performance has varied across regional markets, says Savills, with specific office markets showing significant under/over performance depending on their position in the cycle.

With positive occupational markets, lack of development and limited choice for occupiers, Edinburgh, together with Brighton and Cambridge, is recognised as a ‘high performer’ by valuers who are applying higher rental value growth and increases in capital values (see Savills analysis of MSCI data above). In comparison, markets such as Oxford, Nottingham and Glasgow have seen no or limited growth in capital values but their strengthening occupational markets have driven rental growth - this will feed through to income return in the medium-term and have a positive impact on values, says Savills.

Mark Porter, director in Savills UK investment team, comments: “Income return is largely driving the performance of the office investment market at the moment, although some cities are still seeing positive capital growth. Even those behind the curve at the moment are likely to see positive uplift in the next few months as the major regional cities are generally undersupplied with new office development, and are forecast to see continued employment, keeping them high on investors’ wish lists in 2019.”

Rod Leslie, director in the investment team at Savills in Edinburgh, says: “Low yields in Edinburgh reflect the potential for rental growth and lack of risk however despite the strong level of investor demand, the level of activity continues to be hampered by a lack of opportunity. By investing in Edinburgh you are investing in a landlords market as supply is so limited and with its World Heritage status there will be restricted opportunity to change this dynamic. Regardless of Brexit, the simple economic argument around supply and demand of good quality offices is very compelling.”

Steve Lang, director in Savills commercial research team, adds: “Overall, the analysis shows quite how much a market’s position in the property cycle can impact short-term returns. For example, some have been ‘hit’ with a short-term structural shifts impacting from a weaker local occupational markets, such as Aberdeen, where oil price falls have led to lower valuations, but despite having been a lower performing office market in the current cycle, it is still a key city expected to out-perform as sentiment recovers.”

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