This time last year JLL’s positive UK property predictions were marred by the polarisation between North and South and between the leading regional cities and the stragglers.
This year, another positive forecast raises the question whether the wealth generated by the recovery will start to spread more evenly around the UK.
JLL expects London to stay at the forefront of global investment, owing to its growth profile, long leases and “safe haven” reputation. But a lack of supply, and new rules allowing Far Eastern pension funds to invest in foreign property, will also drive some UK institutions away from the ultra-competitive London market, becoming net sellers and reinvesting in the regions.
Manchester has been at the forefront. At the beginning of 2014, Scottish Widows Investment Partnership’s purchase of Sunlight House at 6.5% looked like a tight yield. Fast-forward 12 months and a 4.8% yield paid by M&G for RBS’s regional headquarters has set a new tone in the city.
JLL’s capital markets director Angus Minford says: “The big six regional cities, plus the South East, will be the focus for the majority of growth next year, but investors are finding it increasingly difficult to find yield in first-tier regional cities. As Manchester tightens past 5% and the other regions move towards 5%, investors will have to start selectively looking to second-tier cities.”
If regional developers were rubbing their hands before, mandatory enrolment into pension funds will reinforce their glee, with high property allocations expected. And barring election chaos in May or too negative a reaction to a proposed referendum on EU membership, JLL expects a record year for investment.
Driving the change in the investment market is an anticipated shift in occupier trends. London’s soaring residential market and high living costs are expected to drive more employers out of the capital to regional hubs.
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Further bolstering the regional occupier picture, JLL sees nearshoring and re-shoring spreading beyond manufacturing, as financial and services firms look to Manchester, Birmingham, Glasgow and Bristol. An improving jobs market will also boost take-up as firms expand.
But how much of this growth will be felt outside the big six regional cities? JLL expects occupier outflows into already tight markets to translate into headline rental growth of 6% in the South East and 3.5% to 4% in key regional cities, with Leeds and Bristol leading the charge.
Muse joint managing director Matthew Crompton says: “Market confidence is filtering out but in a very patchy way. I don’t think overseas investors will appreciate the dynamics of smaller regional cities. And while local occupiers are waking up to the fact that they can come out of hibernation, it is indigenous churn rather than net inward investment. I think that will continue for the foreseeable future.”But while the supply crunch looks set to force development everywhere, the rarity of big lot sizes and inward investor requirements continues to concentrate investment on regional centres where service and knowledge-based jobs are focused.
And the healthy outlook for alternatives has potential to draw life away from regional cities. Low inflation, improved transport, devolution and growing spending power has led JLL to predict rental growth in the top 20 regional retail locations, offering a rare slice of large-lot high-yielding assets.
Hines senior managing director Ross Blair agrees: “Yield compression in Manchester and Birmingham means we will probably spend more time looking into alternative asset classes – particularly shopping centres where rents can be improved – and the west London/Thames Valley corridor. We might look at core assets in Leeds, Bristol, Edinburgh and Glasgow, but those markets are a bit small for us.”
Urban Splash director Nathan Cornish expects the best student opportunities to continue to centre on Manchester, Liverpool and Sheffield, while other student hubs, such as Nottingham, play catch-up.JLL says the 20% of investment poured into alternatives in 2014 is set to grow, with UK institutions targeting the private rented and student sectors, but even here activity is expected to focus on a select few regional cities within commuter belts.
Meanwhile, in the sheds world severe undersupply is putting pressure on the key logistics locations of the Golden Triangle and West Midlands, creating new development and investment opportunities that will further compete with the regional city centres.
There are plenty of signs that the recovery in property and in the wider economy is spreading beyond London and the South East. Whether the benefits are swallowed by a handful of regional over-achievers may be the next challenge for the industry.
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