What do you see as the most compelling aspects of the investment case for regional offices currently?

We have strong conviction in the regional office markets. There is a compelling rationale today to invest in best-in-class office assets, fundamentally driven by strong rental growth prospects and constrained supply. We are seeing this dynamic provide strong performance within our existing portfolio given the assets we own within core CBD locations in Birmingham, Manchester, Glasgow and Edinburgh

Since the peak of the previous market cycle, regional office prime yields have expanded and now demonstrate attractive spreads to both all in cost of debt as well as to central London sub-markets. In relative terms, today’s pricing looks favourable compared to long term yield averages which provides comfort to any underwrite.

That being said, the profile of asset which is defensive in location, offers real demonstrable reversionary potential, ticks all of the right ESG credentials and requires minimal short-term capex spend is scarce and such a profile of asset is often held by long term investors. This makes finding buying opportunities difficult and competitive.

To what extent has the improvement in the debt markets influenced your appetite for office investments?

The improvement in the debt markets from both a swap rate and margin perspective certainly has had a positive impact on our ability to underwrite office investments. Our funds are typically Euro denominated and we usually hedge all of the equity, therefore putting in place accretive finance is paramount for us in the UK to only be able to hit our returns but also to offset hedging costs, which can be costly with the ongoing global macro-economic environment.

Evidently since the outbreak of the Iran war swap rates have been increasing with the likelihood of returning inflation as well as potential base rate hikes. This is something that we as well as the majority of other core investors will keep an eye on as increasing medium term debt rates will have a clear impact on pricing and exit yield assumptions.

At a macro level, what impact are current global events having on your investment strategy?

As a global Real Estate Investment Manager with over €50bn in assets across the US, Europe and Asia-Pacific markets, we are always monitoring the evolving situation within current global events in relation to our funds, overall portfolio and the investment markets. Our strategy to invest in high quality, sustainable assets within prime locations will not change, however we are taking care to underwrite the potential impact or ramifications that may come about from these events. For example as previously mentioned on debt costs or the potential impact on cost and supply chains, should shipping be impacted for a longer duration of time. Gilt rates are also at the forefront of mind and the expectation that real estate fund returns will need to perform at a higher level if these rates continue to increase and then settle at a higher long term level.

What is your outlook for prime office yields over the next two to three years?

It’s hard to predict what may happen in the coming years given the high degree of global macro-economic uncertainty. However, one factor that will continue to support the argument for yield compression is occupier demand and rental growth. This is something that we continue to see as corporate occupiers continue to grow and modernise their footprints. Investors will pay for the right profile of product and will discount against those that have blemishes and that is why we will continue to see polarisation taking place. Development has been stifled for a number of years and in markets such as Edinburgh, the future supply story remains incredibly constrained. This provides further credence to the rental growth story and outlook for prime office yields given that the definition of prime may become narrower.     

For the assets in your portfolio that are currently being repositioned, what are the key factors you are focusing on in the design?

The key focus of design will always be on producing high quality office accommodation which will hold broadest appeal to occupiers and drive the most value for our investors. Based on live projects we have within our portfolio, we are concentrating on providing outstanding office space which is future-proofed to serve the needs of the occupier, including excellent wellness, end-of-trip, terracing, arrival experiences and an all-encompassing ESG strategy. Flexibility, divisibility and a sophisticated M&E design also form an integral part of design.

Given the absence of new development, do you expect rental growth at the prime end to continue, and do you believe this will trickle down through the wider market?

A value proposition will always have a captive audience to some extent, however secondary or tertiary locations are unlikely to offer the resilience or defensive qualities that prime locations might. We have always typically targeted locations that can hold value throughout market cycles and we don’t expect to deviate from this strategy.