Experts at “big four” Scottish law firm Shepherd & Wedderburn said that, with interest from sovereign wealth funds driving up commercial property prices in London, other investors such as pension funds are looking to “regional” markets for better returns.
With suitable sites in central London scarce, many companies are also looking to save money by moving some operations to other UK cities.
David Mitchell, a partner and property expert at the law firm’s Edinburgh office, said: “In the past 18 months, there have been two [commercial property] markets in Britain: London and everywhere else, where not much was happening.
“What’s happening now is that many people are being priced out of the London market and they are looking further afield.”
In the wake of the financial crisis, institutional investors such as pension funds took refuge in prime property, especially London, he said. But, as the market heats up, they are looking elsewhere for the solid returns they need.
“Your traditional pension fund investors are being priced out of central London because a lot of sovereign wealth money is charging in,” Mitchell said. “We are seeing a lot of major players coming out of London to the regions.”
A similar story is being played out among the occupants of large offices, where a steady flow of foreign multinationals have been choosing London as a European base.
Sally Morris-Smith, a partner in Shepherd & Wedderburn’s London office, said central London sites have been filling up fast in recent months, with a much greater mix of companies booking space in the newest tower blocks than was the case a few years ago when banks were dominant.
About 40 per cent of the recent take-up has been from technology and media firms, with professional services the next biggest sector.
Morris-Smith said prices have stabilised at higher levels for now, but a lack of space and ever-growing demand mean they are likely to rise further.
“Nobody’s rents are dropping,” she said. “Everybody is projecting that rents are going to go up to about £70 per square foot, from £50 now, over the next three years.
“Those people who have been brave enough to do speculative development, their buildings are filling up quickly because they are ahead of the game.”
With few vacant city centre sites available and most of those subject to limitations, companies seeking a bespoke office are among those having to look further afield. Even investment bank Goldman Sachs, for which “money was no object”, has chosen to build a campus-style “banking factory” on the edge of the City, near Fleet Street.
Morris-Smith said that, for top multinationals, London’s intercontinental transport links are key, as is the need to have a prestigious address in a city that high-flying employees are happy to move to.
But many are looking to shift some of their work to peripheral hubs, including Edinburgh and Glasgow, in a process that has become known as “north-shoring”.