Return to search

A cautious note on the UK regions

International capital could be turned off the UK’s regional cities if cap rates relative to London narrow further

Hines was a relatively early mover into the regional office market in the UK. Up until 2010, the Houston-based developer and manager was almost exclusively focused on London but then branched out to the UK’s second biggest city, Birmingham, where the firm recently signed Deutsche Bank for 130,000 square feet of space. It also has invested in Manchester and in Bracknell in the south east of England through a joint venture with Oaktree Capital Management.

Ross Blair, managing director of Hines UK, said international capital has been driven to the regions due to London pricing and a lack of acquisition opportunity. In fact, he warned that there has been so much interest in the UK regions that international capital could get “scared off” in 2014.

“The big challenge for the regional markets is this: maybe 18 to 24 months ago, there was a big divergence in pricing between prime London and prime Birmingham, for example,” Blair explained. “However, over the past 12 months, that gap has narrowed considerably. If prime London is a 4.75 percent cap rate today, Birmingham is probably 6 percent. If that gap becomes too narrow, I think some of the reasons international buyers are attracted to the regional cities will be washed away.”

Blair told of an instance recently where he and a colleague toured Birmingham with a Korean source of capital. The international investor was interested in Birmingham if the price was right. However, the Korean investor felt the pricing differential with London was not great enough to take the next step and convince its board back at home to invest in the UK regional city.

“In my opinion, for international capital to have its focus turn to Manchester, Birmingham, Glasgow and Edinburgh, there needs to be an economic reason to go there in addition to the point about availability,” said Blair. “If those markets get too overheated because perhaps the UK pension funds start to go there en-masse, I think some of the international capital will turn its back on those markets and return to London or, more likely, other European cities.”

Blair added: “It is great for the non-London markets that they are heating up. At the same time, if they get too hot, I think they will scare off the kind of capital they might have attracted.”

Up until now, Hines has been very focused on office in the UK, but Blair thinks the firm will look very seriously at shopping centres and the residential sector in 2014. He also thinks that there is no reason why cap rates shouldn’t harden further by 25 basis points in both the city and the west end of London in 2014.

Although Hines is dealing with around 300,000 square feet of vacant space in London that it wants to let, it already is eyeing new office projects. “There will be an early-mover advantage for people who get the next developments or heavy refurbishments off the block,” Blair said. “Vacancy is relatively low in central London, and the amount of speculative development being delivered over the next few years is relatively low. If one can produce a quality product in the next two or three years, you can do quite well. If we can find a way of delivering in 2015 or 2016 in the city, midtown or the west end of London, it will be an interesting place to be.”