Of the nine regions in England, London region, the capital city, is dominant; next is South East that covers a much larger area but whose population exceeds London by only about 500,000; the other seven are what those in London and the South-East would regard, sometimes in derisory tone, as the provinces.
The North-West, East of England, West Midlands, South West, Yorkshire and the Humber, East Midlands, North East, each region has its own character and drivers of economic growth. As a means to attract non-savvy investment, the seven regions have something in common: vested interests talking up the potential in the hope of persuading and alleviating doubt.
As public sector guardians of community and employment opportunity, local authorities promote the economic advantages of their counties, but local property investors can have a different agenda. Rather than be content with their lot and plodding on, instead they envy the gains that come from investing in London and the South-East and they too want a share of the action.
The commercial property market, with its sectors and segments, is not one big market where anything happening affects the market as a whole. The market comprises individual properties in their own particular locations. Investment yield reflects rental prospects for each particular proposition. Rent is a product of supply and demand. Generally, greater demand is in the most populous built-up areas. Based on the 2011 census, Greater London has a population density 5,630 people per square kilometre. The next highest are West Midlands at 4076 and Greater Manchester at 4051. Thereafter, it is downhill all the way.
As a percentage of total population, the largest minority comprises London and South-East. The other regions constitute the majority but, because the built-up area density in the other regions is much lower, it is possible for business tenants to succeed with less competition. The more ‘out in the country’ the city/town, the lower the density – and in some places the higher the quality of life. Long gone is the time that people lived and worked in the same town and spending power was contained. Local resident and catchment population life-style is not a reliable indicator of the potential for commercial property rents, except for the housing market: even then the supply of building land and new housing development can put a ceiling on prices.
In the provinces, potential for rental growth is generally more limited, which is why it is possible to buy relatively high yielding investments compared to the lower yields in London and South-East. While yield-compression has narrowed the gap between understanding the difference between a growth investment and an income investment, that lack of understanding tends to be confined to inexperienced investors, most of whom buy property at auction often overpaying while in a state of bidding frenzy. Amongst professional investors, higher yielding investments are not normally thought any better than higher yielding.
If only to minimise social unrest, politicians would like want the regions to shine. The “Northern Powerhouse” is a good example: a central Government proposal to boost economic growth, particularly in the core cities of Manchester, Liverpool, Leeds, Sheffield and Newcastle, with the aim to rebalance the UK economy away from London and the South East. It makes sense to aim to buy before prices take off. But, for buyers, whose money is to be ploughed in, why when the potential is allegedly in sight would the current landlord want out? What’s the catch?
The answer is that the only way for existing investors in provincial regions to cash in for a profit is when their property interests are in the right place at the right time. Sellers advocating the ‘right’ place doesn’t mean it is. Opportunism is made to sound convincing. Gullibility falls for hype because imagination over does it. But, with commercial investment property, which converts liquid capital into an illiquid form, it is either spot-on, or not. The reality of the economies in provincial regions is hard to overcome. Pockets of affluence exist, few and far between. Otherwise, depending upon the type of property, location, there is rarely enough demand to exceed supply. Full occupancy doesn’t have to be an indication of anything more than that the rents are economical for the tenants.
In provincial cities and towns, it’s not that there is resistance to rental growth, so much as little or no evidence of any. For capital valuation, the stuff of investment yield, evidence of sustainability is what shrewd investors are after. A lease to a good covenant with a tenant break clause may not be symptomatic of anything untoward in London and South East, where break clause can also be a negotiating ploy, but is more likely to be interpreted adversely in the other regions, where lettings to decent covenants are income-oriented, to avoid empty property rates and punitive building insurance premium. Without evidence of sustainability, no matter new landlord-protestations, the valuation methodology is no growth and hence a higher yield.
In an era of low interest rates, and an investment market awash with cash and bank lending, the high yields in the regions should tell you something. It’s not that the regions have been overlooked, on the contrary, there is simply not enough growth to risk investing for performance. For every successful investment, dozens under-perform. A good way to lose is to be fooled into imagining that potential for rental growth is more than the informed would reasonably expect. In attempt at urban agglomeration, political interference aims to rebalance the economy, even though imbalance is natural.
The Rent Review Specialist