Birmingham: The New Place for Investors

Posted on 6 October, 2015 by Chris Grigorovsky

Usually when we think of London there’s a certain image we create. For as long as we can remember it has been seen as the hub of the business world in the UK. With its vast business districts and awe inspiring office skyscrapers, it is a romanticism for businesses and investors alike. It will forever remain as the go to place for commercial property with no sign of diminishing. However, this all seems to be changing, as a mixture of financial protection and lack of space, there is a new contender that has entered the mix that investors are beginning to spark fiery interest in.

Birmingham The New Place for Investors

Birmingham’s Bright Future

In an annual survey of European investors’ intentions, the city of Birmingham was voted as the most investable city in the UK in 2015, as well as sixth best in Europe, while London only came in tenth. The investors’ decision was due to the fear of a property market bubble in the global centres like London. So what has made Birmingham the go to destination for investment and office space?

In an article published by the Birmingham Post, Chief Executive of Inward Investment Programme Marketing Birmingham, Neil Rami, said that the rising GVA and redevelopment projects are making investors pay attention. Adding: “Birmingham’s new developments and its rising GVA- which is increasing more than any other UK core city- are creating a sustainable investment destination for companies across the world.” He also mentioned some of its schemes including the £600 million redevelopment of New Street Station and £500 million redevelopment of Paradise Circus. What’s more Birmingham is the city with the largest number of start-ups created outside of London, with 18,000 in the past year.

It seems that investors are becoming wearier with their spending, as David Smeeton, the Director of National Investment with Colliers International in Birmingham, said: “Investors simply cannot derive the returns they require from the central London and South East investment markets and are being forced up the risk curve and out into the regions.”

“Birmingham’s infrastructure investment programme sets it apart from other regional cities…there is a huge opportunity for economic growth and job creation. The next wave of speculative office development is about to begin- there has never been a better time to be doing deals in Birmingham.”

The results do not lie, as Knight Frank’s Birmingham Report Spring 2015 states that in 2014, economic output for the city was £16.8 billion. The report also mentions Deutsche Bank that “made a landmark decision in 2013 to further expand their operations in Birmingham, renting an additional building on Brindley Place and relocating around 2,000 staff from London to create ‘HQ Campus’.” HS2 Ltd, deliverers of UK’s highest speed rail network, and the firm behind construction of the high-speed rail line between London and Birmingham and the North if England, also got in on the action and recently rented nearly 100,000 sq ft based on how much more confidence there is for the city.

Also reported was the strong level of occupier activity in Birmingham city centre in the second half of 2014, with took up totalling 341,164 square feet in Q4 alone, doubling that of the preceding three quarters. The total number of take-up last year was 713,460 square feet. The vacancy rates in Birmingham, according to Colliers’ Birmingham Offices July 2015 report, are currently at 14 percent across the city, with 13.7 percent in the city core. Furthermore, Grade A office vacancy rates has reached its lowest level at 9.3 percent and is expected to drop further in the next couple of years. While in the Manchester Offices July 2015 Report on Colliers, it reported that Grade A vacancy rates reached a record low at 7.1 percent, a dramatic change from mid 2012 which was at 20 percent.

One of the latest and biggest developments for Birmingham 2015 comes from HSBC and the announcement of moving its headquarters to the city from London by 2019. In the move, 1,000 head office jobs will be going with it and the building will be home to UK retail and business banking operations. The bank are currently in talks in securing a lease on a new 210,000 square foot office in the Arena Central Enterprise Zone. The move is amidst concerns of the increase in bank levy.

Chief Executive of HSBC UK, Antonio Simoes, said: “Birmingham City council has worked hard and significantly invested to make the city an attractive home for UK businesses and their employees.”

What’s more, in a somewhat surprising turn of events, it was revealed that the Government are reportedly considering moving the Channel 4 studios to Birmingham. It is currently located in Horseferry Road, Westminster and employs 800 people. This discussion for the move came from the idea of diversifying the country’s media hub away from the capital. The Sunday Telegraph reported that there were simply discussions of this move taking place and nothing is set in stone. So what is happening in the nation’s capital city?

Birmingham Infographic

This shows Birmingham’s strong presence in Start-up businesses in 2014

London’s Struggle

The Telegraph published an article which looked into whether or not the London office market was on the verge of a major shake-up negatively or otherwise. A graph from Savills showed that rent for office space in central London has its highest at £55.34 per square foot, surpassing that of 2014’s heights of £51.56. It is a dramatic increase compared to 2002 in central London when the highest was £49.47 per square foot. The article says that in the first quarter, prices in the West End have “broken records and demand for commercial premises in the city has gone through the roof with companies security space in the latest developments before the first brick is even laid.”

The highest commercial property achieved were in the areas of Mayfair and St James’s. These are known as traditional places for hedge funds, wealth managers and property companies, with rents in 2007 hitting £140 per square foot. Small businesses are now expected to pay £150 per square foot. While in other cities like Manchester, according to Savills’ Manchester office market report for June 2015, the highest rent reported in 2013 was £30 per sq ft, in 2014 it increased to £32. per sq ft, and is expected to further increase to £35.50 by 2018, which is a 3.2 percent growth per year over the next five years.

In the Knight Frank Central London Quarterly Q1 2015 report, it stated that despite a strong performance in 2014 for the city, property demand fell back in the first quarter of 2015. Take-up totalled 1.9 million square feet, which is a 13 percent fall on the previous quarter’s level in the city. Also reported was investment turnover, which in Q1 reached £2.3 billion, while investment sales volume was down in comparison to the strong fourth quarter last year, seeing £4.6 billion transacted. Demand for property in the city of London, despite a strong performance in 2014, saw a 13 percent fall, with activity levels in Q1 2015 taking a fall to 1.9 million square feet.

One of the major contributing factors to this decline is the supply of space available within the city. In the Knight Frank report, it states that the availability of space is on a continuing downward trend. The quarter end figure totalled 5.8 million square feet, which is 33 percent below the long-term average at the same point last year. As the availability dwindles, the vacancy rates follow suit and it is currently at 5.7 percent, which is the lowest it has been since 2001, and is expected to tighten throughout 2015. Over the last twelve months, 9.3 million square feet of space has been let, which, according to Knight Frank, “makes the 6.8m sq ft currently available look worryingly low from a tenant’s perspective.” In a graph representing the various types of purchasers of City investment in the first quarter of 2015, private investors were the third lowest out of the six categories, with £173 million invested.

The Chief Economist’s view on London in the report said that vacancy rates are currently at 5.4 percent, which is the lowest it has been since the third quarter of 2013. Alongside this is the increase in prime rents which have now peaked above 2007’s levels. It continues to say that current tenants who are coming up to the end of their lease and are making a decision on whether to stay in their property, are going to get a big shock at how high the rents are on the open market. “A typical West End tenant with a ten year lease expiring in 2016 is going to find rents are around 30-35% higher today than when they moved into their current office in 2006.” It goes on to say that there is a substantial increase in business rates over the same period, up over 70 percent for the West End.

It is a problem that plagues the investors for commercial property in this post-recession period we are currently going through.

The scenario is somewhat like a double-edge sword, as the lack of availability for space in London is due to investor interest from the previous years, which then causes rental prices to increase due to the area’s popularity. Ironically, the outcome has led to investors starting to find the idea of putting money into a property in the city highly unappealing.

The Cycle Repeats?

Birmingham is at one of its most exciting and ambitious periods in recent years. Stories surface nearly every week about property acquisitions and new developments in the pipeline. It is truly a city that sees no sign of slowing down and is keeping the momentum at full pace. Which brings up the question of whether or not Birmingham will eventually suffer the same fate as its neighbouring cousin.

As mentioned before, popularity is always a fantastic thing to achieve and with Birmingham currently increasing its appeal on an international scale, more eyes will be drawn to the city with the second largest population. So what happens when Birmingham becomes too popular? The scenario could be that of London’s where over time, as its appeal begins to rise, the availability of commercial space will start to diminish and in return it will see an increase in business rates and rental values begin to manifest itself over time.

So what do you think the future holds for Birmingham’s success and its long-term effect on London’s commercial offering?

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