Visitors to the world’s largest property fair last week were talking of centres outside the capital as the next growth area. Richard Waite reports
As visitors to the MIPIM property fair returned to work this week, the government threw its weight behind Michael Heseltine’s regional growth plan.
The coalition’s decision to adopt 81 of the 89 pro-development recommendations will be a welcome boost for those looking to build outside London – the proposed multibillion pound Single Local Growth Fund, to which local enterprise partnerships will be able to apply for backing from 2015, will be particularly well received by MIPIM attendees.
Those in the know spoke at MIPIM about how overseas cash, which after years of pouring almost exclusively into safe-haven London, had started to trickle out to higher-yield opportunities in the next tranche of major cities around the country.
Adam Challis, head of residential research at commercial property agency Jones Lang LaSalle, said: ‘Heseltine’s regional growth proposals capture and leverage a real paradigm shift for UK property investors. The safety of prime London assets has now been more than offset by over-strong pricing for many investors.’
There are good-quality, non-London locations offering a better performance
He added: ‘While, there is still a good argument for conservative property investment at the moment, many investors are seeking improved yields and believe there are a number of good-quality, non-London locations that offer a better performance story.’ Challis said investors were already looking ‘more closely’ at regional centres such as Manchester and Leeds, where 7-8 per cent gross yields were on offer.
Mark Farmer, head of residential at EC Harris, agreed. He said: ‘When it comes to outside London and the wider regional residential market, the level of overseas interest is still much less.
‘But, interestingly, it appears to be steadily growing. Weak Sterling is certainly making the UK attractive to overseas investors. There appears to be a growing awareness that some regional UK towns and cities offer interesting opportunities when it comes to buying new build residential properties.
‘Specifically, there is a clear increase in attention from the emerging middle-class mainland Chinese market.’
Farmer said schemes in Birmingham, Salford and Manchester, which would traditionally have been marketed domesticly, were now being snapped up by Chinese and Malaysian investors. He added: ‘[These moneymen] are looking at certain regional residential locations where they can get good value compared with the hotter London residential market, where pricing can be three to four times as expensive. It is also at a price point that does not attract the higher levels of Stamp Duty, Land Tax or any risk of ‘Mansion Tax’. These purchasers are very astute and still see the opportunity for good rental yields and longer-term capital growth driven by the fundamentals of housing supply and demand in the major UK areas of employment and commerce.’
Michael Spriggs, managing director of UK Land Estates, said: ‘There’s clear evidence that both overseas and domestic investors are showing more interest in higher-yielding quality investments outside London. That was very evident at MIPIM.
‘Though we’ve got sufficient funding [for our projects] the fact that there is an improving investor market makes it easier to justify building.’
Throughout last week in Cannes the MIPIM rumourmill was awash with news of US cash heading both into London’s Docklands and, surprisingly, beyond the M25. Peter Murray of the NLA said: ‘It [has become] increasingly difficult to find sites at the right price in London. I know of a couple of American funds which are picking up bargains in the regions.’
Manchester-based Ian Simpson of Ian Simpson Architects said: ‘I’m conscious of how heated the London market is becoming. It would be good to see funds flowing back into Manchester again – it’s a city that needs investment.’
Ben Adams, of Ben Adams Architects, said they also had ‘anecdotal evidence’ to back up the gossip and had recently bagged projects in Stockton-on-Tees, Manchester, Brighton and Harpenden.
The cost of acquiring buildings or sites in London is so high that yields are squeezed
Adams said: ‘The issue with London is that the cost of acquiring buildings or sites is so high that yields are squeezed and make development difficult to justify.
‘I wonder if this will sort itself out as the panic elsewhere in Europe subsides and prices in London soften.’
The financial ripples have not yet been fully felt by everybody on the ground. Nick Johnson, formerly of developer Urban Splash, said: ‘We’ve yet to see evidence of [foreign investment] in the regions.
‘With new development the costs of building are still greater than the value at the end, which is why there is so little activity at the moment, so I doubt Qatari or Russian money will be racing up the M1 just yet.’
Chris Williamson of Weston Williamson concluded: ‘There was some very bullish talk on the Manchester Stand and especially in the Manchester Bar. But that is to be expected.
‘However, London competes more with Paris, Berlin, Dubai for investment at the moment. It is hard to see the other UK Cities taking significant funds away from the capital.’
David Partridge, managing partner at Argent
‘There was markedly more interest from investors in the property outside of London, particularly the experienced European funds, seeking better yields
Peter Damesick, chairman of Europe Middle East and Africa Research at CBRE
‘We’re seeing some large overseas investors looking at UK regional cities for opportunities. There are German funds looking and some investors from Asia beginning to consider those markets.
They tend to go for Birmingham, Manchester and Edinburgh. They may have made initial acquisitions in London and for investment again they are looking further afield. So they could be considering UK regional cities alongside the possibility of investing elsewhere in Europe.
Higher yield for the investor in regional market is compensated with lower investor liquidity in those markets. In regional markets you’ve got to think about what sort of investment demand there is for larger single plots. I wouldn’t say this trend is brand new. It’s been around now in place for a year. But as yet it hasn’t broadened. It hasn’t produced a huge amount of activity.
There is still probably quite a bit of caution about entering into development in regional markets. The development pipeline in the regions is extremely low. The trigger for pulling in more investment will be clear evidence of rising rents and somewhat stronger demand on available supply.
Clearly areas outside London are not developing very strong occupier demand. If we are right and the economy picks up later this year, then you could see more investment in development projects at that point.’
Bob Ghosh, co-founder of Birmingham-based K4 Architects
‘The London tent was impressive, but there was something of a post-Olympic hangover feel about it. The legacy argument is now wearing a bit thin. My old friend Clive Dutton - head of regeneration in Newham - cited jobs as the number one priority for East London from which everything else will flow. However, there is no magic formula for creating these conditions to tackle mass unemployment in the poorer boroughs.
On stands such as Business Birmingham, Leeds City Region, Nottingham, Leicestershire and Manchester’s slick balcony there was considerable excitement about specific investment opportunities, but I did not see much evidence of international investors scrambling to get involved.
Ultimately, the draw of the capital is unassailable
Ultimately, the draw of the capital is unassailable. I was fortunate enough to attend CBRE’s Global Investment Forum breakfast at the Majestic, which was a real eye-opener. According to their Head of Research Dr Peter Damesick, London is still some way ahead of other European cities as the key place for real estate investment. If anything, London is cementing its position in this respect and I personally don’t see this changing in a generation. Any inward investment into the UK is good news for the economy and major infrastructure projects like HS2 should help re-balance the North-South divide and make ‘the regions’ more attractive to future global investment.
I don’t see any evidence of a slow-down in London, neither at MIPIM nor on the ground in the UK. As a practice, we are getting more opportunities there than ever before and have recently talked about opening a London office.
Marcus Lee of Glenn Howells Architects
‘I heard [at MIPIM] that a line has been drawn west - east from Gloucester through Watford and Cambridge and only everything below that was being embraced - although Deloitte’s presentations on London hotspots [even] ignored the south of river, apart from a band of riverside.’
MIPIM report: foreign investors eye UK’s regional residential market
MIPIM report: foreign investors eye UK’s regional residential market