The regions outside London and the South East offer better value to investors
London dominates the UK’s economy to a degree that is unusual in many other European countries. It accounts for 22% of the UK economy. London and the South East together represent 37% of UK gross value added (GVA). The North West is the next largest regional economy with 9% of the UK’s GVA.
At the end of 2013, the last year for which figures are available, London’s economy was 9% larger than it was in 2007. Outside London and the South East, the West Midlands and Scotland are the next best performing regional economies. They are both 0.4% larger than they were in 2007. London’s office market is ten times larger than its nearest rivals, Glasgow and Manchester. It is also twice as large as the combined office stock of the UK’s big six regional office centres.
It is therefore no surprise that London has been the destination of choice for domestic and overseas property investors. As a result, yields on prime Central London offices are 140 bps lower than their fifteen year average and 50 bps lower than the level achieved in June 2007 immediately before the market imploded. Central London shops and offices and Greater London industrials are the only segments of the market that have recovered all of the value lost after 2007. This presumably is why 50% of contributors to the Q2 2015 RICS UK Commercial Property Market Survey felt that commercial property valuations in London are above fair value.
In contrast, across the UK (excluding London), 95% of respondents to the RICS survey believe that current market valuations are either at or below fair value. Prime office yields in this part of the UK are still 70 bps above the level achieved in June 2007. Rest of UK shop and office values are still 40% below the level achieved in 2007 and Rest of UK industrial values are 27% lower.
At the regional level only the economies of London and the South East had fully recovered from the recession by the end of 2013. At the city level, however, the outlook is more promising. By the end of 2013, the economies of Birmingham, Manchester and Glasgow were all bigger than they were immediately before the onset of the Great Recession. Whereas the economies of Bristol and Edinburgh had repaired any damage suffered. The economy of Leeds, however, remained 7% below its pre-recession level at the end of 2013.
In 2013 the economies of Birmingham, Manchester and Leeds grew faster than the UK average. Greater Manchester South comprising Manchester, Salford, Stockport, Tameside and Trafford grew by 3.9%, Birmingham by 4.2% and Leeds by 2.4%. The UK national average was 1.6%. The economies of Bristol, Edinburgh and Glasgow, however, under-performed the national average in 2013.
Investment in commercial property in the regions outside London and the South East has steadily improved since December 2012. Since June 2014 investment in the regions has eclipsed investment in Central London and has carried on growing whilst the levels of Central London investment have declined (see Chart 1).
The favourite City destinations for commercial property investment capital since the end of 2012 have been Manchester and Birmingham. Investment in these two cities was greater than the combined investment in Bristol, Edinburgh, Glasgow and Leeds combined.
The increased levels of investment have been reflected in strong growth in capital values. Office values in Birmingham, Bristol Edinburgh, Leeds and Manchester have all increased by 10% or more in the year to June 2015. Industrial capital growth across all six major centres has been stronger still. Birmingham industrial capital values grew by 17% in the year to June 2015.
Birmingham has been the top destination for relocations from London according to a report from the Office for National Statistics. HSBC has moved its retail banking headquarters to the city and Deutsche Bank has expanded its presence in Birmingham where it employs 1,500 people in technology and support functions. The city is also increasingly on the radar of international companies.
The city is also increasingly on the radar of international companies. The Greater Birmingham and Solihull Local Enterprise Partnership attracted more foreign direct investment than any other partnership in the UK. Investments numbering 73 have creatrd nearly 4,800 jobs. Extraenergy, a German power supplier, is a recent investor. It has 500,000 customers and is moving its 400 staff to bigger offices.
Although it won’t go down well in Liverpool or Yorkshire, Manchester has recently become the de facto capital of the North as it becomes the first UK city outside London to be run by an elected mayor and receive fiscal powers devolved from Whitehall. The Government is keen to develop the idea of a Northern Powerhouse to redress the economic imbalance between the North and the South and to attract investment into northern cities and towns. Central to this aim are plans to improve communications between Liverpool, Manchester, Leeds, Sheffield and Hull.
RBS has moved thousands of roles to Manchester while the BBC employs more than 2,000 people giving a boost to the local digital and creative industries.
Latham & Watkins, one of the USA’s biggest law firms, announced plans in January to open a new business services office in Manchester. Another law firm Berwin Leighton Paisner, Ford Credit Europe, the financing arm of the carmaker, and Towergate Insurance have also moved to Manchester in the past year.
Manchester’s inward investment agency, Midas, has confirmed that at least seven big companies including the law firm Freshfields are considering opening in Greater Manchester rather than expand in London. Each one is looking for about 100,000 sq ft of space, suggesting about 600 people would move or be hired.
A resurgence in economic activity and demand for commercial space in the UK’s biggest regional cities is being reflected by increasing rental value growth. In the year to June 2015 All Property rental values grew by almost 3% in Birmingham, Bristol and Manchester. Such rates of growth have not been seen since 2007.
Retail rental value growth has been weak across the UK’s major Cities but office rental values in Bristol and Manchester grew by 5% in the year to June 2015 and by 3% in Birmingham. Growth has been even higher for industrials with Birmingham sheds seeing rental value growth of 7% over the same period.
Strong post-recession economic growth in London has resulted in high rental levels. Rents are £67.50 in the City and £125 in the West End. Many consider investment values to be above fair value. As the economies of the UK’s largest cities recover, occupiers and property investors are looking to the better value available outside London and the South East.
Chart 1; Rolling 12m investment (£billions)
Source: Property Data and Alexander Property Research