Why investors are looking to the UK’s regional cities

London is far from the only UK city on the radar of real estate investors.

13 marzo 2019

Investment around the UK’s regional office markets remains strong, thanks to higher yields offered in comparison to London. Transaction volumes in the UK’s eight biggest regional markets – Manchester, Birmingham, Leeds, Bristol, Edinburgh, Glasgow, Cardiff and the Western Corridor – hit £4.6 billion in 2018.

This was down from £6.2 billion in 2017, in part due to increased caution stemming from Brexit. However, the biggest issue has been an acute lack of supply.

“The regional markets can offer greater value than both London and comparable European cities,” says Barrie David, Director in JLL’s UK Offices Research team. “Investors will be focussed on well-let, good quality assets, and investment grade product will become increasingly sought after.”

But, a lack of investment grade buildings in the UK’s regional cities is holding back higher transaction levels.

“Many of the UK’s office markets will be limited in terms of short-term supply,” says Vicky Heath, Director in JLL’s UK Offices Research team. “This could be compounded by an increase in pre-letting, as occupiers look for space that allows them to operate more efficiently and attract talent.”

Political uncertainty is also holding back the market’s full potential. “Investors are waiting for the fog to clear,” she says. 

Building for the future

Yet regional cities are starting to respond to rising demand with new developments and regeneration projects.

“The regions are beginning to build to a greater scale, with larger buildings and lot sizes that represent investment-grade developments,” says Heath.

In Edinburgh, for example, the new Mint Building comprises 60,000 sq ft of Grade A space, which has been pre-let by global investment firm Baillie Gifford. Similarly, Manchester’s Enterprise City Campus is set to provide office space and accommodation for up to 15,000 tech and media workers, with already confirmed as the anchor tenant.

And, as prices in London, long the focus of real estate investment in the UK, continue to rise, the so-called Big 6 - Manchester, Birmingham, Leeds, Bristol, Edinburgh and Glasgow - remain more accessible. “The market particularly appeals to smaller investors, who are nonetheless global in outlook and can see the growing popularity of regional cities among occupiers,” adds David.

Across these cities, the public sector, service industries, banking, and flexible workspaces are moving in or expanding. Manchester will soon be home to Amazon’s first UK corporate office outside of London, taking up a six-storey, 90,000 square feet site and creating around 600 jobs. In Glasgow, significant leases by Barclays and Clydesdale banks, as well as the Government Property Agency (GPA), have helped boost the annual take-up total.

Birmingham exceeded the 10-year average with a total take-up of 754,130 square feet, while Glasgow and Manchester both hit record take-up levels with 1.4 million square feet and 1.75 million square feet respectively, according to data from JLL.

Where now for the regions?

As the regional cities seek to attract further investment, transport, talent, and tech all play a key role in boosting their appeal.

“Innovation centres that combine education and start-ups can help nurture diverse talent and, in turn, attract investors,” says Heath. Having secured a reputation as a tech hub, Leeds was recently chosen by national TV broadcaster, Channel 4, as the site of its new headquarters.

Infrastructure is also vital. “Ideally, cities should embrace a multimodal public transit system that offers flexibility and efficiency to improve their connectivity and their accessibility to draw in skilled workers, companies and ultimately investors,” says David. Across the regions, from the new HS2 terminal in Birmingham to Glasgow’s Queen Street Station, major transport hubs are already being transformed into multipurpose developments. 

As the popularity of regional cities increases, the office sector needs to keep pace. “The regions are moving ahead with an understanding that the knowledge-intensive sectors drive city growth, and therefore office market growth,” David concludes. “Now more investment in grade office space is needed in the right locations.” 

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