It’s time to look beyond London property

Manchester @ iStock
Manchester is another city to watch

Central London has defied the gloomsters, but the regions look more buoyant for now.

You can barely move in central London for construction sites at the foot of enormous skyscrapers. But who on earth is going to occupy all of these shiny new buildings once they’re built? Apparently, the demand is there. According to property investment firm CBRE, a “phenomenon” is occurring across all central-London office markets. For the first time, “a clear difference in performance has emerged between new and secondhand – existing – space”.

Demand now far outstrips the supply of new space, while there is an oversupply of secondhand space. So while this doesn’t bode well for landlords of older lets, it hints at continued momentum in the market. And overall, central London’s office market is doing better than expected. Last year, £18bn was spent on deals, 10% more than the long-term annual average, says bank BNP Paribas. Rents for prime City office space stayed steady, and the vacancy rate was down by slightly more than 1%.

It also looks as though the initial worries over the erosion of the wider financial sector, sparking a mass exodus from London, were overstated, says Investors Chronicle. A recent Reuters survey of the UK’s largest financial companies shows that only 2,000 jobs had been relocated by February this year, far below the 232,000 that consultant EY suggested in early 2017 might be at risk.

The relative stability of London’s office market is reassuring. Yet even the most bullish property investor would be wise to make sure that they’re diversified outside of London. Regional offices outperformed central-London offices in 2018, returning 11.5% against London’s 5.3%, according to CBRE. This reflects a rise in the value of properties as well as rental growth of 2.2% in the regions, above the 1.1% witnessed in the Central London office market, as real-estate investment trust Regional Reit (LSE: RGL) pointed out in its latest results.

There’s vim up north

RGL is essentially a play on regional offices. Its portfolio is three-quarters invested in offices, with 15% in industrial property and 7% in retail. Geographically, it is 30% in the south east, 18% in Scotland and 16% in the midlands. The largest holding is Tay House, an office block in Glasgow that is home to Barclays.

And, conveniently, there “has never been a better time to build new offices in Glasgow”, estate agent Savills pointed out recently. The city offers more available, good-quality offices at lower rents than Edinburgh, says Savills, and large companies like Barclays and Morgan Stanley are expanding there. The Scottish and UK government are also investing in the city. (It is worth noting, though, that RGL has recently sold some of its Scottish property holdings.)

Two of RGL’s other top-ten holdings are in Manchester, another regional city to watch. Last year, a total of 1.75m sq ft was rented in 314 deals, which is 64% up on the ten-year average, according to Colliers. The recent rise in yields available on the city’s office buildings makes office property look cheap, says Capital Economics. Returns could average 5% a year, compared with less than 4% across the UK.

RGL has produced a total return of 35% since launch in 2015, relative to -2% for the FTSE All-Share Reit sector index. It is also currently yielding an impressive 9%, which is 93% covered by earnings. It seems a good way to buy into the potential for growth in regional cities.