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UK office occupier costs on the rise

Commercial and residential real estate consultancy, Lambert Smith Hampton (LSH) has released its latest Total Office Cost Survey (TOCS) which reveals the prime core of London’s West End remains by far the most expensive UK office location.

The survey, which provides detailed information on office costs for over 50 UK locations puts the annual cost for a new office in Mayfair at £18,988 per workstation. This stands at 139 per cent above the UK average and 45 per cent ahead of the next most expensive office location, the City of London.

That said, for a third successive year, the survey reveals the gap between the UK’s principal regional cities and London has narrowed from an all-time high in 2016. This reflects the continuation of rental growth in major regional cities, alongside relatively stable rents in the capital.

The average cost of a typical workstation across the ‘big six’ cities – comprising Birmingham, Leeds, Bristol, Manchester, Edinburgh and Glasgow – stands 38 per cent below London’s Midtown district, narrowing from a peak of 44 per cent in 2016’s survey. Nonetheless, the cost appeal of the regional cities over central London remains strong; prior to the global financial crisis in 2008, the discount was only 25 per cent.

This year’s survey also reveals that Cambridge has overtaken Maidenhead as the UK’s most expensive location outside London. The renowned university city has seen several successive years of strong rental growth, with annual costs amounting to £9,350 per workstation.

Digging further into the research, the average cost of occupying a new build office in the UK increased by 3.4 per cent over the 12 months to April 2019, accelerating from 2.6 per cent growth in the previous year and running at double the rate of CPI inflation, at 1.8 per cent over the period.

Notably, rental growth played a more significant role in driving the average cost increase for 20-year old buildings. Net effective rents increased by 3.3 per cent on average over the year, compared with an average increase of 1.9 per cent for new buildings.

With regards to new buildings, the average rate of cost increase over the 12 months to April 2019 concealed a wide range of movements between locations. Around four locations saw growth in excess of 10 per cent over the past year. Exeter saw the sharpest increase, with occupier costs rising by 10.6 per cent, closely followed by Liverpool (10.5 per cent), Milton Keynes (10.3 per cent) and Warrington (10.3 per cent).

In Exeter, an absence of existing new build stock meant its rental increase was based on market sentiment, while the sharp rises observed in Milton Keynes and Liverpool were evidenced by transactional activity in their respective markets.

Meanwhile, Bristol saw the strongest growth in occupier costs for a 20-year old building, rising by 12.8 per cent over the year to April. Supply of grade A space is extremely scarce in the city, which in turn is putting significant pressure on rental levels of older, secondary buildings.

Oliver du Sautoy, Head of Research at LSH said: “UK office costs are now rising faster than inflation, reflecting tight supply of quality space all around the UK and an increasing recognition amongst occupiers that quality office space is key to staff productivity and retention.

“However, taking a longer-term view, the movement in average occupier costs has not kept pace with inflation over the past decade, meaning average costs remain lower in real terms than before the 2008 financial crisis. Only 10 locations have seen occupier costs rise above inflation over the past decade, all of which are found within London and surrounding regions.”

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