The old adage of putting your money in bricks and mortar has never run so true. Worries over the stock market have meant more people and firms turning to property to secure their futures and make their fortunes.
Birmingham is benefiting from this trend. Over the past 12 months, an estimated £500m of investment has been ploughed into the city. There were several significant deals in the office and retail sectors, but much activity was in the residential market. Last year saw more than £100m of deals done in this sector alone, and 2005 looks likely to continue the same way. The same cannot be said of the office market, where there is a shortage of new build.
Lack of office supply
The West Midlands capital offers attractive office growth to investors. In fact, IPD predictions for 2003-09 show Birmingham’s rental levels will increase by 3.9% compared with Manchester’s at 2.6% and Leeds’ at 1.2%.
But one of the reasons for the predicted growth is the lack of development in the city over the next couple of years. Birmingham has 294,000 sq ft in the pipeline compared with Manchester’s 824,000 sq ft, Edinburgh’s 448,000 sq ft and Bristol’s 500,000 sq ft.
David Allen, head of investment at NAI Fuller Peiser, sums up the city’s situation. “There is a genuine lack of office supply in central Birmingham caused by lack of speculative building and the conversion to residential. While there is a staggering amount of money waiting to be invested in property, there is a shortage of prominent office buildings for investors to buy,” he says.
With large-scale schemes such as Snow Hill struggling to get off the ground, investors have been left with an abundance of secondhand and refurbished buildings. “The pressure is on secondary space rents because of the shortage of new buildings,” states Richard Goodall, a partner in investment at King Sturge.
Yields being achieved on secondhand space are as high as 7.25% compared with new-build at just under 6%. But secondhand space does not provide the overall rental performance that comes with new build. “You are not getting the capital growth, and there are still not enough trophy buildings in the market,” Goodall says.
Birmingham’s retail market also has a shortage of developments. “Retail has been polarised by the Bullring,” says Goodall. Last year saw most of the significant investments sold off. ISIS Pavilion Central was sold for £98m, and Martineau Place was sold to a group of Irish investors for £93m. “Those deals were the major drivers behind the retail investment market,” believes Goodall. “Ownership in retail is limited. There are only about five or six shops on High Street, and up to seven available on New Street.”
The lack of new stock in the retail and office markets has led investors, and their money, to the residential sector.
According to King Sturge research forthe Bank of England, 85% of new flats sold in the Midlands in 2004 went to investors. So hot is the market that Andrew Spittle, a director with DTZ Residential, says that some investors were making 20-30% returns by selling as soon as they obtained vacantpossession, having reserved a few months before.
Apart from a lack of new stock in other sectors, other factors are driving residential investment such as a continuing fashion for city-centre living, younger people wanting to rent for longer before buying, and financial attractions.
The government was offering zero stamp duty in city-centre areas in order to help power regeneration. The Southside development in Hurst Street by Crosby Homes is one scheme to have benefited.
Overseas investors are also attracted by the level of UK interest rates, currently at 4.75%. “Investors can borrow at their home country level, but benefit from the growth of the UK’s city-centre living phenomenon by investing in cities like Birmingham,” says Ben Hudson, partner and head of residential at King Sturge.
Irish invasion
Leading the overseas investor move into the residential investor market are the Irish. Knight Frank research shows Irish investors ploughed more than £100m into Birmingham’s city-centre market last year. Mark Evans, partner with Knight Frank, calls the pace of the Irish invasion “unstoppable”.
However, the Irish, along with those who wanted to make money quickly in the residential market, are in danger of being pushed out by the big corporates. Spittle says: “We are seeing a move to larger investors – such as institutional and property companies – coming in. British Land is looking very closely at the market, as is Grainger Trust. But on a more general basis, we are talking to other institutions that are now coming back into the market more strongly because they see Birmingham as a good long-term prospect.”
Some believe the residential market is starting to slow down. As Mark Swallow, head of Knight Frank’s Birmingham office, says: “The big test will be whether the letting market keeps up with the amount of empty space. At the moment it’s okay, because people are still moving back into the city centre.”
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Industrial Sheds are becoming increasingly popular with investors, particularly among funds, which are changing their attitude towards active management. Jeremy Pearson, partner in investment with Drivers Jonas, says: “There are a lot of recovery funds out there. In the past, funds that wouldn’t have got their hands dirty with active management are now prepared to move into this area because it’s a way of creating value.” Any kind of shed for sale is attracting attention. David Allen, partner and head of investment at NAI Fuller Peiser, says there has been overwhelming demand for multilet industrial estates. “One or two funds are in the market for speculative development, and there is a significant private investor market in all types of industrial estate or single units,” he says. |
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The diminishing supply of stock in Birmingham means investors are turning their attention to the region’s other towns and cities. Andrew Spittle, a director with DTZ Residential in Birmingham, says: “Investors recognise there’s medium- to long-term potential in the region, and that is driving development forward.” Marc Walker, associate in Savills’ Birmingham investment team, agrees. He says investors are being tempted “by capital values, which are lower in the likes of Coventry”. The biggest mixed-use scheme in Coventry is Oakmoor Estates, and Deeley Partnership’s Belgrade Plaza, which has already attracted investors’ attention. Among the plans for the scheme are 80,000 sq ft of retail and leisure space to include a casino and two hotels, and more than 300 residential units. Ben Hudson, partner and head of residential at King Sturge, says there is strong interest from investors to buy the bulk of the residential, which will not even begin to be built until April atthe earliest. “Investors want to buy units off plan and subject to planning,” he says. |
