It is no secret that numerous firms are currently seeking to move into Birmingham thanks to the large number of ongoing regeneration currently taking place in the West Midlands city.
According to CBRE, the resulting occupational markets, coupled with the recent £1.3 billion worth of infrastructure improvements, have created the “perfect climate” for commercial property investors.
Director in CBRE’s capital markets team Nick Woodward believes that the spike in demand for city centre office opportunities could see investment volumes reach a record £1 billion by the end of 2015. In fact, so far this year, CBRE’s capital markets team in Birmingham has acted in an advisory role on more than £340 million worth of deals, giving the firm a leading market share of 47 per cent.
Mr Woodward theorises that the current yield compression in Central London has played a pivotal role in attracting investors to the Midlands, as average yields in Birmingham stand at 5.25 per cent. When compared to the City of London at 4 per cent and the West End at 3.5 per cent, this is certainly a strong draw – especially given that rents are continuing to rise in line with strong demand.
Mr Woodward says; “Birmingham is the only major city in the UK where prime office rents have not yet reached the levels achieved at the peak of the last market cycle in 2007.
“This is largely due to the lack of new development over the last five years.
“This means that Birmingham has significant rental growth still to come, with rents forecast to reach £35.50 per square foot by 2019 – with a couple of high profile pre-lets on the horizon, we could see a jump in prime rents by the end of the year.”
The strong demand for office investment property has already been proven this year, with a number of high profile deals having been sealed during the first half. These include 7, 8 and 10 Brindleyplace in a deal worth £131 million, 27 Fleet Street and 65 Lionel Street for £69 million, and a fresh deal which saw the sale of One Colmore Square for £87.3 million.
Unfortunately, though, investors can no longer expect to find a plethora of bargains when seeking entry into the Birmingham market, as a lack of speculative developments in the city’s office sector has elevated the level of competition for prime properties. Mr Woodward believes that now may be the best time for those considering a large scale investment to strike, as the currently high yields cannot be expected to continue forever.
He continues; “The results of the city’s infrastructure investment will soon be visible: New Street Station and Grand Central, anchored by John Lewis, opens in September and the Metro extension soon afterwards, whilst HS2 is further along the track.
“We undoubtedly have a lack of stock in the £20-50 million bracket, which is the typical sweet spot for most investors.
“If the right type of asset came to the market we could see yields dip below five per cent – the rental growth story alone will justify further yield compression in the short term.”
Do you think investors are likely to be put off by yield compression in the longer term?
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