Brexit or no Brexit, the UK remains an attractive investment option. But who is spending? And where? Which parts of the country are faring well and which saw the biggest drops in funds in the first half of the year compared with the same period in 2017? Savills crunches the numbers.
Five ways to assess how resilient a local area might be to a hard Brexit
Mat Oakley, head of commercial research, Savills
With the probability of a hard Brexit increasing, it is useful to be able to assess just how much a particular region might be affected if the UK leaves the EU without a deal. Here, we have put together a quick way of assessing a location’s exposure or resilience.
How diverse is the local economy?
While most business sectors will see a slowdown in activity if uncertainty rises around a hard Brexit, locations that have a more diverse industrial structure will be far more resilient.
Is the area over- or under-dependent on higher value-added industries?
Higher value-added industries such as professional services and information and communications tend to be quicker to bounce back from internal or external shocks. A location that is strong in these industries will recover faster from a hard Brexit.
How dependent are the location’s industries on migrant labour?
Given that a key red line for Brexit is immigration, it is likely that any Brexit outturn will result in less migration from the EU. In some UK regions as much as 15% of the workforce is from the EU, and industries such as agriculture and tourism are particularly dependent on migration. Lower migration will limit population growth and affect operators’ margins.
How much does the local economy depend on exports to the EU?
As much as 15% of some regions’ output relies on exports to the EU. While this will not end, the costs of exporting will rise and this will affect the medium-term profitability of exporting businesses. If these costs increase too much companies may consider relocating their operations to a market within the EU.
Another consideration is the nationality of companies in that region, with up to 1% of employment in some regions related to Foreign Direct Investment from the EU.
How dependent is the region on structural funds from the EU?
While the government has guaranteed subsidies for farmers at the current EU level until 2022, this is not the only industry that depends to some degree on EU subsidy.
Funding from the European Regional Development Fund and European Social Fund will also cease on Brexit, and this will affect some regions more than others if the UK government does not step in and match the current funding regimes.
Non-domestic investors are missing out on opportunities outside London
James Gulliford, joint head of UK investment, Savills
Overseas investors are familiar with the UK regional commercial markets, investing £2bn of the £11.6bn put into the markets in the first seven months of the year.
Office stock has been high on non-domestic wish lists given that the limited new development in many locations over several years had caused regional office yields to tighten. Compared with London and the South East there is opportunity for rental growth in regional cities, with markets such as Bristol and Leeds setting new headline rents. But given that competition for assets is so fierce, are international investors missing a trick in largely confining themselves to just one section of the market?
A prime office block with one or two large corporate tenants, whether in Glasgow or Exeter, offers a sense of familiarity and security to an overseas buyer. Given the underlying fundamentals of the regional office markets remain robust, they would be foolish to neglect them, but retail warehousing and logistics space are also viable options if an investor is looking to diversify.
We are seeing occupier demand for logistics space increase as online retail demand continues to grow, leading to a tightening of yields with prime yields for multi-let estates currently at 4%, compared with 4.75% for regional offices.
Retail warehouses are another asset class worth consideration: as the e-commerce boom continues there is considerable scope for adaption of the sector in terms of click & collect to last-mile provision. Institutions and domestic investors have recently reduced their activity in the sector, leaving space for overseas capital to increase its presence.
Alternative and mixed use assets, including hotels, saw investment rise 16.4% year-on-year to reach £2.2bn in H1, as investors looked outside London to diversify their portfolios, but this was driven largely by UK buyers. Non-
domestic buyers should start to branch out from core office stock and look into alternative opportunities that can provide higher income return and regeneration opportunities.
