Across the country occupier confidence is rapidly following investor sentiment up the confidence curve. But don’t for a moment think that all regions are or will remain equal. Fault lines, already apparent, are widening.
First the good news. There is evidence that the summer softening in the market – and the economy – was temporary.
Prime yields for some (read riskier) commercial property assets moved out by as much as 50bps in October as the impact of a late summer “slowdown” took hold, according to Cushman & Wakefield. But, says head of European investment strategy David Hutchings: “Yield compression in the UK may have slowed, but it is unlikely to be over, particularly given the improving position of the occupier cycle.”
Reinforcing that message is this week’s MSCI/IPD UK Lease Events Review 2015. It shows that commercial property leases have reached an eight-year high. Rising occupier confidence is driving competition for space.
From a macro perspective, October’s rise in the national Purchasing Managers’ Index, that most closely watched of economic indicators, “provided evidence that Q3’s slowdown in the recovery was just temporary and the regional PMIs suggest that this improvement was seen across almost all the regions”, according to Capital Economics.
And this is where we start to see those fault lines emerge. Northern Ireland and the North East saw their balances fall. Performance was most troubling in the latter. “The North East was the only one with a PMI below the 50 mark that theoretically separates expansion from contraction,” warns Capital Economics.
On the other side of the tracks, activity in the East Midlands and East of England was especially strong. Indeed, the two regions pushed London off the top of the leader board. “We continue to think that the UK recovery will regain some pace after its recent soft patch, which should be felt in most regions,” argues the UK economics team. “But next year the UK faces a number of headwinds which could cause regional divergences to widen.” They added the word “temporarily” to that. Add property fundamentals to the equation though, and a more mixed regional outlook appears inevitable and entrenched.
At this week’s Estates Gazette Development Summit in Manchester, Savills’ head of European commercial research Mat Oakley left the 250-strong audience in no doubt that the lines would widen.
“Northshoring” is persuading more and more London occupiers – HSBC, Deutsche Bank and Freshfields, to pick a handful of recent examples – to move parts of their operations away from the capital. But these moves have focused on cities – Birmingham in the case of the banks, Manchester for the lawyers – with deep labour pools and decent transport connections. There are only a handful of locations that can offer similar credentials.
For Oakley, it is a similarly divergent story on the investor side.
Only 26% of towns have a current average office rent of £25 per sq ft – the level which made developments viable for many propcos. And even in towns where development is happening – there is currently 11m sq ft under construction outside London, equivalent to 50% of last year’s take-up – there is a risk of undersupply tripping into oversupply, fast.
Twenty towns, said Oakley, have a development pipeline of more than 50% of last year’s take-up.
With unemployment falling to levels last seen before the financial crisis and wages rising, there is no reason to expect employment growth to accelerate in the near term. Ensuring that a city or region remains attractive from an investment and an occupier perspective requires a combination of attributes. A deep, skilled labour pool is perhaps chief among them. A local authority willing to work creatively with the private sector is perhaps as important.
