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News Release

London

Regional growth will be the property story of 2015 as UK institutions look to invest beyond Central London

Regional cities, the South East and emerging London will also benefit from companies and staff priced out of the City and West End.


London, 8th January 2015- The UK regions look set to become the winners of 2015 as domestic institutions sell in Central London and re-invest in higher yielding markets, according to JLL’s Property Predictions.

Central London will remain very attractive for global investors, with Asian pension funds likely to be significant players over the year, a result of the easing of restrictions on overseas property purchases. This weight of money will continue to put pressure on yields, which will prompt many domestic investors to realise capital growth. However, the international presence in the regions will grow – with US private equity likely to be a particular feature. Nevertheless, given the uncertainty around the May election, overall volumes are unlikely to top 2014 levels. With the office development pipeline thin in the City and West End, occupiers will increasingly look to emerging London markets such as Stratford, White City or Battersea. This trend will be mirrored in the residential market, with Greater London seeing significantly faster growth than Central London at 3 per cent - even though the national picture is likely to be one of stability.

Increasing office rents in the capital, and concerns over rising costs for employees, could prompt more employers to look at ‘nearshoring’ parts of their operations to the South East or the main regional cities. The numbers involved are unlikely to prove significant for London, but could have a dramatic effect on cities such as Birmingham or Bristol – boosting their retail and residential markets as well.

However, the office development pipeline is still extremely sparse in such cities. Lack of supply is already leading to reduced incentives in the regional markets and JLL predicts that over 2015 there will be a return to headline rental growth in the South East and the main regional cities. Increases of 3.5-4.0 per cent are expected in Manchester and Leeds, with 6.0 per cent growth expected in the South East. These cities are also likely to see strong growth in retail rents in the medium term, with the market continuing to favour these dominant centres or a growing category of ‘prime convenience’.

With construction cost inflation predicted to rise to 6 per cent over 2015 and widespread labour shortages emerging, it is hard to envisage more than a modest increase in speculative development. However office refurbishment could become more widespread, particularly given the rising importance of workplace ‘health’ and sustainability to occupiers and investors alike.

Jon Neale, Head of UK Research at JLL commented: “London is booming – it is one of the fastest growing urban economies in the developed world and 2015 will see it continue on its strong upward trajectory. However, London’s constraints will become more of an issue on the margins, with housing costs increasingly on occupiers’ radar, office supply shortages becoming more apparent, and construction costs impacting on development . With the weight of international money targeting London still growing, some UK investors may see this year as the right moment to realise capital growth.

“This will result in strong demand for ‘emerging’ London locations such as Stratford and White City. However, the major UK cities and the wider South East are well placed to benefit from investors, companies and staff priced out of the capital – a ‘nearshoring’ trend that improved infrastructure may reinforce. This is unlikely to be more than a trickle in London terms, but given the disparity in office market size, it could have a dramatic effect in cities such as Leeds, Manchester and Birmingham. This could also boost their residential and retail markets in the medium term.

“Among occupiers, there will be an even greater focus on issues such as workplace health and sustainability – partly the result of the ongoing ‘war for talent’ as well as a renewed focus on improving productivity.”

JLL also predicts that base rates will remain unchanged at 0.5 per cent until 2016; leaving room for further yield compression. UK inflation is likely to remain well below two per cent for the duration of 2015 which will lead to increases in disposable income and greater economic confidence, particularly in the retail market.