Investing in the regions is certainly not a new phenomenon, but it is undoubtedly becoming of greater interest to the wider global audience.
The UK and London look set to remain a ‘safe haven’ for overseas property investment, while most recently benefiting from attractive sterling values. However, with the higher volumes of interest attracted to London, the smart money is looking for greater value and recognising the benefits and opportunities that the regions can offer.
The regions in contrast to London are characterised and influenced by specific industries and economic factors making them more resilient. London is heavily weighted towards the financial and business services and tech and media sectors, while the regions have a diverse range of sectors and clusters, including engineering, science and technology.
Residential and commercial investment returns have slowed in London, while the regional markets are seemingly buoyant, particularly in the industrial and alternatives sectors. In the first three quarters of 2018, direct property investment in the East Midlands, North East and Yorkshire & Humber increased 24%, 19% and 67% respectively, while Greater London remained at similar levels to 2017.
This follows record-breaking office leasing activities in Manchester, Leeds, Birmingham and Edinburgh, each hitting more than one million square feet of take up.
This regional office take up has been bolstered by the government’s decision to move functions out of Whitehall. The public sector accounted for around 25% of regional office take up in 2017, according to KF Properties. This was a major cost saving exercise in the wake of the financial crisis and shows confidence in our regions, with corporates such as WeWork and Amazon opening offices in Manchester, while Channel 4 has selected Leeds for its National HQ.
Keeping a watching brief on government initiatives and trends provides access to potentially lucrative ideas.
‘Build and they shall come’ has worked in many scenarios but the decision to build speculatively is a fine balance of demand versus supply, while calculating the risks. As a guardian to our investors’ capital, we are creative and innovative, but it is vital to fully understand local variances to avoid following a trend and being caught short at the wrong point in the cycle.
Business location decisions are driven by access to markets, appropriately skilled labour and occupational costs. Some businesses will always be tied to specific locations, but with the assistance of technology and government infrastructure programmes improving accessibility, many are recognising the benefits of the regions. Employee’s quality of life and ‘wellness’ has been a much-discussed corporate topic and is becoming a factor when deciding on location. After all, staff retention and performance are key.
The success of the regions is reliant on ambassadors promoting and capitalising their local economy, while attracting the appropriate labour to support it. Take the Cambridge, Milton Keynes and Oxford growth corridor; home to some of the world’s leading universities and science and technology companies.
The growth, sustainability and success of this corridor is predicated on delivering the supporting infrastructure, tackling transport, labour and connectivity constraints. This provides numerous property investment opportunities that we are targeting.
Too much competition
The competition for assets and capital in London is immense, which makes it harder to find value. To ensure a higher chance of success and the delivery of strong risk-adjusted returns to investors, we focus our attention on areas with less competition and where expertise and experience is critical, which reduces the number of players in the market.
The regions are not so reliant on overseas investment and often the deeply embedded industries are not as sensitive to global issues, making it a more predictable market place.
We have invested in more than £300 million of property assets, with weighted towards logistics as well as selective offices and an increasing number of residential developments and alternatives such as care homes.
Our current funds are on track to deliver on or above their target return of 15% IRR per annum and have been oversubscribed as investors scramble to gain access to value in the UK regional property market.
While we still have little idea of what the EU/UK relationship will look like, we can be confident in the structural changes driven by the internet and the changing demographics across the UK, as well as the fundamental attributes of our regional cities and the forward-thinking nature of our leading industries.
While the government has been consumed by Brexit, the ‘Northern Powerhouse’ and ‘Midlands Engine’ have had little air time. However, the devolution of power together with notable mayoral figureheads Andy Street, James Palmer and Andy Burnham, have helped the regions drive inward investment with a pipeline of exciting and innovative investment initiatives and opportunities, which will create long term structural stability.
Thanks to the strength of our thriving regions and major cities, the UK’s world class reputation will remain and continue to be attractive to investors.
Hugh Elrington is head of property at Barwood Capital.