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Up, Down, Shake It All Around: 3 Things We Learned About UK's Regional Big City Property Markets

Three Snowhill, Birmingham

England’s Big Three regional property markets of Manchester, Birmingham and Leeds start 2021 in surprisingly good fettle, according to Deloitte’s annual crane survey, published today.

Yet the data revealed warning signs in some cities and reasons for celebration in others. 

Bisnow crunched the numbers.

1. Birmingham Offices Could Be A Winner

'Floor space under-construction' data is simultaneously a leading indicator and a lagging indicator: It reveals what investment committees thought several years ago, and it indicates levels of supply in several years’ time. That makes reading it unusually difficult.

At first blush the Deloitte data appears to show a Birmingham office development scene in freefall. The survey shows completion of just over 210K SF in 2020 — similar to the levels seen in 2016 and less than the 10-year average. On this reading, 2019’s relatively high completion total of 775K SF was a blip in an otherwise steady spiral of diminishing completions. 

Yet look at the volume of office floor space under construction and the picture is rather different. Whilst the three big English cities have all experienced a decline since 2018, Birmingham’s has been relatively modest, down to 1M SF from 1.1M SF under construction in 2019, and from 1.4M SF in 2018. How to explain this?

The drop in completions to 210K SF represents decisions taken several years ago in the shadow of big speculative starts like Ballymore’s 420K SF Three Snowhill and Federated Hermes’ £700M Paradise developments. The relatively steady volume of office space under construction suggests developers decided to play safe. This turns out to have been wise. They have been rewarded with a relatively high level of pre-lets compared to the other regional powerhouses: Deloitte said around 51% of office floor space under construction in Birmingham is pre-let.

With relatively little new space coming onto the market, the pressure on rents will obviously grow.

Elsewhere, Leeds stands out. Confidence in the Leeds office market has been growing over the last two years, boosted by the arrival of broadcaster Channel 4 and by well-sourced rumours of a major government relocation. Completions in 2020 were above trend at 667K SF, the highest since the 2018 total of 804K SF.

Comparing 2018 with 2020, Manchester saw a sharp fall in office space under construction from 2M SF to 1.3M SF, as developers and investors digested existing supply. Total completions in 2020 held steady at 1.2M SF.

2. Birmingham City Living Stutters, Manchester And Leeds Surge

The volume of residential development in central Birmingham slowed markedly from 2018 to 2020 and, based on the levels currently under construction, it will be some time before it ticks up.

In 2018 there were 5,065 units under construction in Birmingham, but by 2020 this had slipped to 3,886 units, a fall of 27%. The total completed in 2020 was 2,072 units, up from 1,001 units in 2019, but the relatively low under-construction figures for 2020 suggest an uneven pace of growth.

Leeds and Manchester turned in steady performances. The volume of units under construction in Leeds has remained steadily between 2,200 units and 2,800 units since 2018, but completions surged in 2020 from just 107 to a more respectable 1,211 as the supply pipeline kicked in.

Manchester’s supply pipeline continued to bulge. The total units under construction dipped a little between 2018 and 2020, down from 14,500 to 12,300, but completions ticked up rising from 3,619 in 2019 to 4,914 in 2020.

3. Student Housing: The Brakes Get Slammed On

Purpose-built student accommodation was a favoured and increasingly popular asset class until the coronavirus pandemic threw most rental calculations into chaos. Recent evidence, including distress faced by some operators, suggests a shakeout could be on the way.

Deloitte’s data offers some comfort to investors by showing how PBSA developers and backers slammed on the brakes over the last two years suggesting that, once the current surge in supply is delivered, the pipeline will dribble rather than gush.

The volume of PBSA bedspaces under construction in Birmingham fell by 73% between 2019 and 2020, and yet more dramatically from 2018 to 2020 (down from 2,667 units under construction to just 447). In Leeds the equivalent fall in bedspaces was 66% and in Manchester 48%.

It will, however, take some time for the slowdown to effect completions, which soared in 2020 in all three cities. Birmingham’s completions jumped from 810 in 2019 to 1,458, while Leeds rocketed from 376 to 2,107 and Manchester surged from 384 to 1,410. 

Under-construction figures suggest several more years of rising completions before the market levels off.