Key findings from this year's survey.
- Recent cost movements track inflation
Across the 54 surveyed locations, the average cost of occupying a new build office in the UK increased by 2.6% over the 12 months to March 2018, rising from zero growth in the previous year and running marginally ahead CPI inflation over the period, at 2.5%. The rate of cost increase was virtually identical for 20-year old buildings, coming in at 2.7%.
While 2017’s Rating Revaluation has had some influence on occupier costs via business rates, movements in headline rents and landlord incentive packages provided the main driver for cost changes over the past year. Meanwhile, other, day-to-day running costs have either tracked or marginally undershot inflation.
The flat growth in average UK occupier costs observed in the previous survey largely reflected softening rental levels in the key Central London markets, which had the effect of dragging down the UK-wide level of growth. In contrast, rental costs in the 12 months since have been relatively stable in these markets.
- Bristol leads Y-on-Y cost increase
The average rate of cost increase over the 12 months to April 2018 masks a wide range of movements between locations. Of the 54 surveyed markets, Bristol saw the largest percentage increase in occupier costs for a new office building, rising by 9.8%, followed closely by Exeter (9.3%) and then Cambridge (6.1%).
In all the above cases, the growth was driven by growth in net effective rents, with Bristol’s sharp rise coming on the back of a step change in rental levels following the delivery of much-needed new build stock to the market.
Meanwhile, of the 54 locations, Brighton saw the strongest growth in occupier costs for a 20-year old building, rising by 7.8% over the year to April. Supply of grade A space is extremely scarce in the city, which is in turn placing pressure on rental levels of older, secondary buildings.
- West End’s relative cost premium erodes for a second year
- Occupier costs are cheaper in real terms, long term
The heart of London’s West End remains by far the most expensive UK office location, with the annual cost for a new office in Mayfair standing at £18,142 per workstation, 134% above the UK average and 48% ahead of next most expensive location, London’s Midtown district.
That said, for a second successive year, the latest survey reveals the gap in costs between the UK’s principle regional cities and London has narrowed from an all-time high in 2016. This reflects the continuation of rental growth in the major regional cities, alongside 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 40% below London’s Midtown district, narrowing from a peak of 44% in 2016’ survey. Nonetheless, the cost appeal of the regional cities over central London remains strong; prior to the great recession in 2008, the discount was only 35%.
Maidenhead, which will soon benefit from the arrival of the Elizabeth Line remains the most expensive location outside Greater London for a second successive year, with annual costs amounting to £7,960 per workstation.
Taking a longer-term view, the movement in average occupier costs over the past decade as a whole has not kept pace with inflation, meaning costs have actually fallen in real terms. Since 2008, average prices have increased by 24% through inflation, whilst average occupier costs for new buildings have increased by only 14%. Evidently, the immediate effects of the great recession in 2008 continue to leave a mark on rental values.
Of the 54 locations, only ten locations have seen occupier costs rise above inflation over the past decade, all of which are found within London and surrounding regions. Moreover, only three markets have shown substantial real terms increases in costs since 2008, namely Hammersmith (up 46%), Cambridge (up 46%) and Richmond (up 41%).