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Property Investor News – 15 May 2019

Across the UK, new tech ventures are thriving in major hubs outside of the M25, and with residential property in the capital still costing 13-14 times the average local salary, plus rising office rents, the number of start-ups that are choosing the regions over the capital is rising.

The UK’s tech start-up culture is going from strength to strength. When more than 10,000 start-ups launched in 2017 it smashed all previous records, but last year the figure was close to 12,000 start-ups. While 40% of these are still being launched in the capital, the regions are rapidly closing the gap.

London, where Shoreditch’s Silicon Roundabout has long been considered UK tech’s spiritual centre, still features strongly but there has been a surge all over the country. At the end of February, data from Companies House revealed that the number of new tech companies launched in the UK rose by more than 14% in 2018. There were 11,864 software development and programming businesses incorporated in 2018, up from 10,394 companies the year before.

London had the highest number of tech start-ups with 4,752, a 14% increase in line with the national average. This was followed by the southeast with 1,398, a 2% rise, while the northwest recorded 1,079 new tech firms, a 48% rise on the previous year. The number of tech firms grew across every UK region except Scotland where numbers fell 4% to 444 and the northeast where numbers remained flat at 175.

David Blacher, at accountancy firm RSM, which compiled the figures, said: “Given the current economic uncertainty, it’s fantastic to see that tech start-ups have continued their upward trajectory. While the rate of increase didn’t match 2017 when we saw a 60% jump, the numbers show that entrepreneurs are continuing to innovate and venture capital, private equity and traditional funders are still lining up to commit funds to the right projects.

“London and the southeast still dominate, but we are also seeing encouraging signs of increased activity across the regions, particularly in the northwest. Tax incentives such as the Enterprise Investment Scheme, R&D tax credits, video games tax relief and the Patent Box regime are all playing their part in helping to fuel this growth.

“The challenge for start-ups, particularly in the tech space is to develop at speed and to scale-up fast. There can be a high rate of failures as projects can often get overtaken by new technological innovations or better resourced competitors. But get the formula right, find the right backers and success can be very lucrative.”

Put simply, a “start-up” is any company that is just starting. Generally, it’s attributed to tech companies that are no more than five years old. According to the UK-wide tech programme and initiative Tech Nation, the UK’s digital tech sector is worth nearly £184bn, and start-ups provide a vital pipeline for this.

But the rising cost of renting office space in the capital has meant that many tech start-ups are increasingly looking for a base outside of London. They are being aided by the establishment of business communities and co-workspaces across the country. With large universities in regional cities providing a steady stream of new talent, and many skilled workers realising that the living expenses in London are very likely to leave them worse off financially even if the position pays more, the regional tech scene is now thriving.

But it is not just tech jobs that are thriving in the regions. At the end of March the Office for National Statistics released jobs data for 2018, covering all employment. It showed that more jobs were created in the northwest of England last year (a net gain of 129,000) than they were in London (a net gain of 79,000 jobs). As a percentage of job creation, the northwest increased by 3.5% last year compared to a 1.3% in the capital, which was lower than the average for England in 2018 (1.5%).

The jobs data does not bode well for Wales and Scotland however, (see table), as it shows that the number of jobs fell by 12,000 and 22,000 last year, respectively. This was not a “one-year blip” either and when looking at the past 2.5 years since the Brexit vote (mid-16 to end-18), the countries have lost 31,000 and 39,000 jobs, respectively.

During that time, the northwest has created 198,000 new jobs (up 5.5%), second only to London, which created 234,000 new jobs (up 4.1%). The combined data of overall job growth and tech start-up growth show that London economic growth is slowing down but in the northwest it is still accelerating.

North sees economic revival
Will Kinnear, director at flexible workspace broker GKRE, gives us his insights into the fastest growing flexible workspace towns and cities in the UK and the growing opportunities for investors.

Since the creation of GKRE in 2013, the firm has acquired over 350,000 sq ft of new sites for a variety of clients. Will says that while London is at the centre of the phenomenon that is the flexible workspace sector, with 2.5m sq ft leased to flexible workspace operators in 2017, there are now more than 5,300 flexible workspace centres across the UK with Birmingham, Manchester and Leeds reporting double digit growth in the past two years.

Leeds has Britain’s fastest growing legal sector, with the big six law firms all having offices there, while Manchester has become a key centre for media and entertainment with the growth of Media City in Salford. With Manchester and Leeds established as regional hubs, Liverpool is also expanding quickly. It is the 4th fastest growing UK city, with a growing flexible workspace presence, and the number of centres increasing by 23%. Liverpool boasts 23,407 digital jobs with a GVA of £359m. Meanwhile, the cost per workstation has increased 36% due to increased demand.

Will suggests that the next towns and cities to see strong growth in the flexible workspace sector will be: Nottingham, Liverpool, Oxford, Cambridge, Brighton and Sheffield.

I start by asking Will what impact Brexit is having on demand and whether he thinks there will be any winning or losing regions within the UK after it leaves the European Union.

“Uncertain economic conditions have always fed into the flexible workspace model with companies not wishing to overcommit when looking at their short to medium term options, and Brexit has undoubtedly increased the need for greater flexibility. That said, a growing and stable economy that supports business growth is clearly the best long term outcome for both London and the regions. It’s impossible to say whether there will be winning or losing regions as a result of Brexit in the context of the flexible workspace market. A lot may depend on the general elasticity of demand and the quality of the flexible workspaces being offered in those areas, which is already the case.”

Are UK businesses expanding out of London at the moment, and if so, why?

“There are businesses expanding out of London. We’re seeing all sorts of businesses expanding out to different parts of the country. Manchester has become home to a number of large national television broadcasters including the BBC and ITV, Sky Limited is headquartered in Leeds and Siemens in Nottingham. Such large corporates create not only jobs but a supply chain from which growth companies can benefit. Liverpool and Brighton are both burgeoning technology hubs, Cambridge is a hub for biotech and pharmaceuticals, Oxford for aerospace and artificial intelligence. Milton Keynes plays host to Santander, Goldman Sachs, Metro Bank, Red Bull Racing and Network Rail. As these regional centres expand and grow, flexible workspace operators have begun to push out to those regions. They are clearly doing so because they are following demand and if they are offering the same products as they are in London it is likely they will be better value for money.”

Will adds: “The most activity is being seen among those cities that sit on the HS2 line and that has been obvious for some time. Initiatives such as the Northern Powerhouse and Midlands Engine, which have been created to support business growth in the regions, are also helping and with improved infrastructure cities in the regions will continue to grow and flexible workspace will help support that growth.”

Young graduates used to move to London for the best opportunities. Have you seen any signs that this trend is reversing?

“Recent trends have shown professionals moving out of London. They are going to: Brighton (6,000 in 2017), Leicester (4,100 in 2017), Nottingham (4,000 in 2017), and Oxford (3,400 in 2017). This is a trend that has grown in recent years with the high cost of living in the capital and the cost of residential housing among the chief reasons most people decide to leave.

“Proximity to grandparents, or potential future grandparents, can also drive young families to move out of London. At the same time, certain cities have been working very hard to ensure they do no lose talent to London in the first place. Manchester has been particularly adept at this and has the second highest talent retention rate behind London at 51%, while Birmingham is fourth at 49%. Meanwhile, Liverpool now boasts 23,407 digital jobs.

“So it seems clear that there are efforts to stop all of the talented people heading to London, but whether the trend for young graduates moving to London has slowed or reversed is harder to say. The evidence suggests neither at present. The capital still attracts 1 in 4 university graduates overall and 2 in 5 Russell Group graduates with an upper second class degree. Meanwhile, over half of Oxbridge graduates move to London. But with continued effort and government support there is no reason why this won’t change over time and this is the point of trying to rebalance the UK economy with initiatives like the Northern Powerhouse and Midlands Engine.”

Where in the UK do you think has the biggest undersupply of quality shared office space at the moment?

“We are seeing a lot of office stock being taken off the market and redeveloped under permitted development rules or being converted into student accommodation, so we are witnessing a general undersupply of good quality office space nationwide. But where this is happening it has had the knock-on effect of putting pressure on office rents, which have started to significantly increase in the regions, leading to more speculative office developments.”

Will describes the potential of the shared office market: “The flexible workspace market has huge potential. Across Europe right now flexible workspace accounts for just 1.7% of the overall market but it is growing very quickly indeed. In the UK, flexible workspace accounts for 5% of the office market but I think in the next three to five years it could easily account for 10% or even more of the overall UK office market. It could even go further.”

Lastly, I ask Will what options a property investor has if he/she wants to allocate funds into the shared office market. He replies: “There are essentially three ways that investors can get into the flexible workspace market. The first is to create a new flexible workspace product yourself.

“Secondly, you can invest in established property owners and funds such as British Land, The Crown Estate, Landsec and Legal & General, all of which have already launched their own flexible workspace operations in the past couple of years. Others like Blackstone and RDI REIT have invested in an existing operator, ‘buying in’ the knowledge and expertise of a sound business.

“Thirdly, some investors are choosing to collaborate with a flexible workspace operator and share profits through a joint venture management agreement. These can be best described as the outsourcing by a property owner of the sales, marketing and all revenue generation of their asset as flexible workspace to an operator under the terms of a service agreement.

These agreements are quickly becoming a favoured route for commercial property owners as they can provide returns in excess of ERV and ownership and incubation of their tenants. Property owners also rightly see such agreements as lower risk than directly investing in a flexible workspace operator or running their own operation.”

A wave of redevelopment projects are transforming the UK’s regional cities
Many of the UK’s big regional cities are embarking on ambitious redevelopment projects turning rundown areas into vibrant, modern neighbourhoods. Up until relatively recently, a number of regional cities across the UK had experienced significant depopulation, as residents moved to the suburbs seeking more space and a better quality of life. These cities, in turn, suffered a downturn in development, with many buildings becoming disused and dilapidated.

However, according to a Big 6 Cities report released by JLL in March, in recent years the trend has rapidly reversed, with the Big 6 – Manchester, Birmingham, Leeds, Bristol, Edinburgh and Glasgow – seeing significant growth in city centre living. This shift is both driving and being driven by large-scale regeneration projects, which are encouraging companies to move in and tap into the cities’ growing talent pools.

Birmingham’s £1.5bn Smithfield development will transform the former wholesale market into 2,000 new homes, leisure facilities, public space and space for the Bull Ring markets. In Manchester, the former Boddington’s brewery will be turned into a mix of new apartments, offices, and public space.

Elsewhere in Leeds, derelict factories are making way for Yorkshire’s tallest skyscraper, and in Glasgow the pedestrianisation of Sauchiehall Street will transform one of the city’s busiest thoroughfares into a tree-lined avenue complete with cycle lanes.

“By combining office space with residential offerings and community areas, regeneration projects can improve the appearance, liveability, and employment opportunities of formerly undesirable urban areas,” says Vicky Heath, associate director at JLL’s UK research team. This, combined with the lower cost of living, attracts skilled workers who might have otherwise opted for London.

At the same time, companies can get more for their money in the regions while retaining access to a highly skilled workforce. “In the war for talent, companies are under pressure to offer a better quality workplace. Moving to a regional city allows them to create larger, more desirable work spaces at lower cost,” adds Heath.

With all of the Big 6 cities boasting several universities and colleges, they have a solid talent pipeline – and as students see these cities regenerating and transforming for the future, many more will be tempted to stay where they are. Regional cities might not be able to reverse the brain drain to the capital, but they are working hard to put a plug in it.