Victor Rivera

Tue, Nov 27

Mind the Politics - The London Belt


Ahead of crucial Brexit negations, the domestic and international investors are carefully preparing for a No Brexit scenario as CBRE reports some considerable worrying in terms of what Brexit would bring to the UK economy, although they doubt there would be any significant challenges for real estate market in the nearest future.

We will concentrate on regions outside London. We will do so as according to the Office for National Statistics, London average house price is twice as big as the UK average and is £486304, - and the market shows clear signs of being unaffordable for most people. Mr Donnell, director of housing market analyst Hometrack, told recently, the prices are the most likely to equilibrate there – Brexit may just accelerate the natural process, therefore, London facing volatility in real estate property prices.

Oxbridge gaining a new meaning.

When people hear a phrase “Oxbridge”, they inevitably imagine old Medieval colleges, students becoming Prime Ministers and, perhaps, rowing competitions.

It seems that a new meaning is just emerging – an Oxbridge real estate corridor. Cambridge (2% GVA expected in 2019), Oxford (1.8%) and Milton Keynes (1.9%) – a city in the between of two university cities – are showing the fastest growth rate in the UK. The reason for this is a unique combination of world top universities being drivers of innovation in their cities, a close distance from London and Milton Keynes location just in the middle, - becoming a bridge between the two. That is why one of the UK Powerhouse report of 2017 suggests that once again these three cities will be the fastest growing cities in England this decade, - with a growth up to 2.5% by Q2 2019.

What assures that the corridor has a future – is that Chancellor Philip Hammond has publicly committed to building up to a million new houses in that area, investing several billion pounds to generate growth – including building roads and new rail lines for commuters.

An Oxbridge real estate corridor is just a part of an increasing trend of people moving in a so-called “commuter towns”. These are the towns near London, - giving people an opportunity to work in the capital, while paying less for rent, - and many people, from graduates to established professionals with families, choose this path. In fact, out of the 10 fastest growing cities 8 are in a distance which allows every-day commuting.

The London commuter belt.

In 2015, EY has rightfully predicted that Reading, a town to the west of London, will lead an expansion of the commuter’s cities. One of the reasons for such growth is that dozens of big companies, such as Microsoft, Oracle, Virgin Media, PepsiCo have established offices there. It allows these companies to pay lower office prices, while keeping in touch with the financial centre. Another reason is a construction of the Elizabeth Line – a Crossrail project, which will effectively unite Reading and London via underground, - boosting attractiveness of Reading property – 1.9% GVA (second) expected in 2019.

Recent 2018 PwC report supports rankings of Reading and an Oxbridge corridor. Analysing such factors as population skill levels, commuting times, new business creation per head and so on, the Big Four company ranks Oxford first (1.3) and Reading second (0.99), while London has just 0.5 score. It also shows, that apart from housing estate, a demand for new commercial projects will be increasing accordingly – and, in a long-run, such towns may shift from a “commuter towns” status to a well-developed cities, with own employment capacities to fulfil the growth, when more companies will realize that paying astronomical rents for London offices is not required anymore.

Apart from already mentioned Reading and the Oxbridge corridor, potential investors would keep in mind cities like Ipswich (1.6% GVA expected in 2019), Southampton (1.5%) or Portsmouth (1.5%). These cities make it to the top 10 fastest growing cities in the UK, and being homes for London commuters, enjoy the overall upcoming trend. Moreover, their expected growth rates to Q2 2019 are 2.0%, 1.9% and 1.8% accordingly.

International visitors. 

We see now, that domestic demand that will fuel growth in the London Belt cities is promising; alas, we should keep in mind growing international demand – with tourists, students and businesspersons visiting the UK frequently.

PWC research shows that weak pound will continue to benefit UK’s hospitality sector, and the country will see more tourists coming – especially, in London – even though the growth is expected to slow down in 2019. Current occupancy rate in London is 83% and is the highest in Europe, while ADR (average daily rate) is £148, a 2.2% increase from the last year. A large number of various sport and entertainment events, business conferences and traditional historic sites will continue to lift demand in both London and regional cities, and it will improve supply – with active luxury hotel developments, as well as more supply for the middle-class visitors.

While tourists are not staying for long, international student numbers show that the UK remains one of the biggest educational centre of the world. As Universities UK insists, international students spending create more than 200,000 jobs with an economic impact of £25.8 billion – very big market for anyone considering investing. The latest statistics available, for 2016-2017 academic year, there were 450,660 students outside the UK, with China accounting almost for 20% of them (around 95,000 students). With numbers increasing every year, it is safe to assume there would be soon more than 100,000 students from China, - yet supporting demand for various student accommodation – especially, for a high-end ones.

As many domestic students prefer staying in so-called student houses towards their education, many international students remain in private accommodations – often more attractive as it gives them more privacy and various benefits such as big common rooms and/or gyms. In fact, as of 2017, the student accommodation market had potentially reached £5.3 billion, equivalent of 75,000 beds. London and its nearby area continues to attract the most of students.

Final remarks.

Knight Frank, an important estate agency, adds that despite the potential negative Brexit outcome, there is a scope for optimism regarding commercial property market. Growth in lending, new capital sources and greater clarity over Chinese capital flows will benefit the UK economy.

As we see, the Oxbridge corridor will accommodate Londoners in the North-West part, Reading-Southampton-Portsmouth arc will attract people to the South-West and Ipswich will generate growth in the North-East. Surely, in between these cities other, smaller towns, such as Luton, Basingstoke or Brighton will get some benefits too, but we now see the emerging future hubs – both for living and employment, easing demand for an overcrowded London. A weaker pound will continue attracting tourists and international students, attracting new investments in these sectors.

Brexit is coming, but so are the opportunities.