Foreign money flowing into London as North stays quiet

DTZ said total direct investment rose by 21 per cent to a four-quarter high of £8.4bn over the period, with £5.1bn coming from overseas.

The real estate advisor added that a shortage of stock in Yorkshire is constraining activity, which is leading to rent inflation.

The capital is taking a greater share of the investment – close to half the UK total in 2012 – as weak sentiment about the economy leads investors to focus on high-quality assets in perceived safe havens, said Ben Burston, head of UK DTZ Research.

“London is foremost in that category,” he added.

Yorkshire, meanwhile, has a lack of high quality assets with long leases.

Mr Burston said: “Investors are being a bit more selective. There is a mismatch between what they are looking for and what’s available.”

Yorkshire saw £200m-worth of commercial property transactions in the last quarter, an improvement on the two previous periods, according to DTZ.

But investment in 2012 appears to be softening with £331m committed in the first half compared to a total of £864m in 2011.

Domestic investment fell over the last quarter across the UK.

Tim Cameron-Jones, head of the Leeds office of DTZ, said the Yorkshire market has seen very little overseas investment, other than the acquisition of Princes Exchange in Leeds in this May.

Credit Suisse Real Estate Management bought Princes Exchange, the home of law firm DLA Piper, for nearly £37m in the biggest deal of its kind in the year to date.

Mr Cameron-Jones said that a sluggish investment market makes it very difficult for developers to speculatively build new offices without pre-letting to occupiers.

“This creates a supply shortage, which as demand creeps back into the market will cause rent inflation,” he said.

“Paradoxically though, as investment yields increase and prices fall, the profit pot for any development is diminished and this will begin to limit developer’s ability to offer some of the very attractive packages that are currently on offer in Leeds.”

A separate report out today from Knight Frank predicts that headline office rents in Leeds are expected to rise to £25 per sq ft by the end of this year.

Headline rents have been steady at £24 per sq ft for the past two years, said the property consultancy, having fallen from £27 per sq ft at the top of the market.

Ed Harrowsmith, of the Leeds office, said: “The grade-A core buildings are all being let. As that supply decreases it’s going to push rents up.

“Demand is quite steady at the moment. A lot of tenant occupiers are out in the market wanting to secure space.”

Law firms including Walker Morris, Squire Sanders and DAC Beachcroft and insurer Allianz Cornhill are all said to have requirements.

KPMG is moving to a new pre-let development at Sovereign Square in the south of the city centre.

Leeds City Council hopes the move will act as a catalyst for regeneration.

“They are the first to make the leap in this market,” said a property professional. “Hopefully a few of the others will follow their lead. It’s a positive thing for Leeds.”

Elizabeth Ridler, of Knight Frank, said: “While market conditions generally remain tough, occupier sentiment is at least showing some tentative signs of improvement.

“Looking ahead, there is no speculative development and availability is therefore expected to continue to fall, which should lead to a hardening of incentives in the short-to-medium term.”

Knight Frank claims that the office vacancy rate in Leeds has stuck around 10 per cent since the third quarter of last year and available space has continued to fall.

Knight Frank said total take-up in the first half of 2012 beat the same period on 2011.