Urban Europe: Understanding how UK cities compete Leeds

Transcription

1 Urban Europe: Understanding how UK cities compete Leeds

2 Leeds is one of the UK s most successful cities. It has clear strengths in professional and financial services, a powerful retail offer, leading universities and a significant cultural presence, which includes Opera North and the West Yorkshire Playhouse. As might be expected, its property market is also one of the UK s most dynamic. Leeds position as a major hub rests on its complementary relationship to other towns and cities across the North, the fast train link to London (just over two hours) and its proximity to some of England s most beautiful national parks. However, Leeds strengths and weaknesses like those of the other main regional hubs are sometimes less than evident when it is compared with London. The capital s world city status, the sheer size of its economy and property market, sets it apart from other UK cities and arguably from other European cities, with the possible exception of Paris. Such comparisons are not particularly useful. With competition between cities becoming more important in shaping the global economy, it makes more sense to put Leeds in the context of similarly sized centres across Europe, rather than just those in the UK. The aim of this report is to provide precisely that broader perspective. How do its economic prospects measure up against those of Lille, Gothenburg or Antwerp? Are yields and rents comparable to those in Stuttgart, Barcelona or Rotterdam? The answers to these questions will provide a unique and refreshing perspective on the threats and opportunities faced by Leeds. 2 Urban Europe: Understanding how UK cities compete Leeds January 2015

3 ECONOMIC AND DEMOGRAPHIC OVERVIEW In our sample of large European cities (see below), Leeds 1 is ranked 21st in terms of population comparable to Lyon, Stuttgart and Cologne. This group of medium-sized regional capitals seems broadly comparable, although it is important to note that Leeds lacks the autonomy and official regional government functions of German cities. Hence, Lyon would seem the most similar: a strong regional city which is often overshadowed by a much larger world city capital. Leeds economy is similar in size to Zurich and Copenhagen, although it is a larger city than both. In GDP per capita terms it is rather more mid-table. At $31,198 per head it ranks alongside Bologna, Dortmund and Berlin. However, things could look rather different in a few years time, as the Leeds economy is more dynamic than any of these immediately comparable locations. Indeed, it is forecast to be the fourth fastest growing among a sample of medium-sized cities (excluding Paris and other major UK cities). Only Helsinki, Dublin and Oslo outperform, although Gothenburg is roughly comparable. It is worth noting, however, that at just over 12m sq ft Leeds office stock is rather smaller than its economy would suggest based on European norms, indicating that there is significant capacity for additional development. Arguably, the most important economic indicator for the office market is employment growth over the long term. As long as there is a reasonable proportion of professional jobs, a close match between job creation and net absorption can be expected. Leeds is 6th in the 31-strong sample, with a 0.74% increase forecast per annum to This is comparable to famously affluent cities such as Stockholm and Milan, but slightly behind Toulouse and recovering locations such as Dublin and Barcelona. Leeds has a higher concentration of employment in the fast-growing professional and business services sectors compared to many European cities. Retail looks to be Leeds strongest attribute: retail spend is forecast to grow by 2.4% per annum over the five years to The only cities in our sample with a more rapidly expanding retail market are the Nordic capitals of Helsinki, Oslo and Stockholm. These figures are useful in context, but cities with similar economies can have widely varying property markets. FORECAST ANNUAL EMPLOYMENT GROWTH, % 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% -0.0% -0.2% -0.4% Madrid Zurich Barcelona Toulouse Dublin Leeds-Bradford Stockholm Milan Oslo Valencia (Spain) Rotterdam Helsinki Lisbon Rome Gothenburg Amsterdam Marseille Copenhagen Brussels Lyon Antwerp Hamburg Lille Berlin Vienna Frankfurt Cologne Stuttgart Source: Oxford Economics 1 This refers to the Leeds Metropolitan Area, which includes Bradford, Huddersfield and Wakefield, as well as some other smaller towns. Urban Europe: Understanding how UK cities compete Leeds Spring

4 OFFICE MARKET RENTS AND VACANCY RATES As at Q prime rents in Leeds were 25 per sq ft, slightly higher than in Dusseldorf and just below those of Rome. However, international comparisons using UK headline rents are often misleading because of the widespread use of incentives which bring down the overall cost to occupiers. Also, some markets may use an average of grade A achieved rents rather than the UK definition of prime. OFFICE VACANCY RATES, Q % Vacancy rate Grade A vacancy rate 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Rotterdam Budapest Amsterdam Prague Utrecht Milan Barcelona** Madrid** Dublin The Hague Dusseldorf Frankfurt/M Brussels* Manchester Glasgow Berlin Paris* Hamburg London City Edinburgh Lyon* Leeds Luxembourg London WE Source: JLL, January 2015 *Paris, Brussels and Lyon Vacancy in newly completed stock **Barcelona and Madrid Estimated from the Grade A vacant stock % Consequently, Leeds may offer far more value-for-money than is initially suggested, even after the 1 per sq ft increase JLL is forecasting during While the current arrangement may help investment into real estate, it may result in an incorrect impression that Leeds, alongside other UK cities, is an expensive location for occupiers. The fact that rent free periods are also reducing means that means net effective rents are up by 9%. At 5.7%, Leeds overall vacancy rate is lower than all the other comparably sized cities examined, with the exception of Luxembourg although Lyon, at 6.0%, is close. Its grade A supply is also very tight at 1.7%, but this is not as low as Brussels (1.2%) and Berlin (1.1%). This is unlikely to change significantly in Leeds over the coming year. While there is currently some 455,000 sq ft of development on site, around 160,000 sq ft is likely to be let in the near future. With demand robust the remainder will be taken up relatively quickly. AN OFFICE MARKET RECOVERY? Figures on take-up and stock make the Leeds market and many regional UK markets appear small in comparison with cities in Europe that are actually of similar size. In countries such as France and Germany far wider areas are taken into account, whereas UK statistics focus on the city centre. Prime rents in Leeds have been flat over the past year, which is perhaps surprising given the list of cities that have experienced some uplifts. Nordic cities such as Helsinki, Stockholm and Oslo are clear outperformers in Europe, and Dublin and Madrid are in recovery mode after dramatic falls after the financial crisis. However, it is less explicable why rents have risen in cities such as Rotterdam, Stuttgart and Lyon which appear to have less robust economic profiles than Leeds. Indeed, Leeds rents have been static since 2005, having remained, unlike many other cities, resilient in the wake of the financial crisis. Unsurprisingly, the Nordic cities are ahead of pre-crisis levels, but the fact that cities such as Lyon and Dusseldorf which are unlikely to see as much employment growth as Leeds are now more than 17% above the last trough suggests that there is plenty of headroom for rents to rise in the Yorkshire city. Our forecasts suggest that rents will increase to over 26 per sq ft by the end of the year. At 4%, this is a sharper rise than any of the cities discussed except Dublin, Madrid and Luxembourg. In the longer term, we can expect to see further acceleration, as the JLL property clock opposite suggests. 4 Urban Europe: Understanding how UK cities compete Leeds Spring 2015

5 AN OFFICE MARKET RECOVERY? PRIME RENTAL AVERAGE GROWTH, % 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% Source: JLL Q Dublin Madrid Luxembourg Moscow Leeds Frankfurt Barcelona Rotterdam Oslo Helsinki Milan Lisbon Hamburg Utrecht Geneva Stuttgart Prague Budapest Copenhagen Stockholm Vienna Brussels Lyon Amsterdam Antwerp Berlin Cologne Dusseldorf Rome Bucharest Zurich The Hague Warsaw EUROPEAN OFFICE PROPERTY CLOCK Q Lyon Cologne Berlin, Frankfurt, Stuttgart, Hamburg, Oslo Helsinki St. Petersburg Rental Growth Slowing Rents Falling Moscow Dusseldorf London WE Stockholm, Dublin, London City Luxembourg Rental Growth Accelerating Rents Bottoming Out Kiev Geneva, Zurich Manchester Edinburgh Amsterdam, Milan, Madrid Barcelona, Paris CBD Warsaw Athens, Brussels, Rome, Bucharest, Budapest, Prague, Copenhagen, Istanbul, Lisbon, Birmingham, Cardiff & Leeds Source: JLL Urban Europe: Understanding how UK cities compete Leeds Spring

6 RETAIL Leeds is now considered the premier retail destination in Yorkshire due to its comprehensive and compelling offer. The opening of Land Securities Trinity Leeds shopping centre in early 2013 has elevated the city into the UK s top four retail centres. The city has attracted a similar number of international retailers to affluent Nordic markets such as Stockholm, Gothenburg, Oslo and Helsinki. Trinity Leeds is located in the heart of the city s retail and commercial core and its 92,900 sq m of space incorporates 120 stores. The scheme is anchored by Marks & Spencer and Primark and since its opening has attracted 20 new international brands including Apple, Victoria s Secret, Fossil, Superdry, Mango and Hollister Co. Leisure has played a key part in the success of the scheme. Key operators include upmarket cinema Everyman and rooftop restaurant and bar, Angelica. The city s traditional prime High Street pitch is centred on Briggate with many other strong areas linking in to it. It is home to several national and international retailers such as H&M, Gap and Starbucks. The Victoria Quarter, at the north end of Briggate, is the main location for up market retailers, including Louis Vuitton, Karen Millen and Harvey Nichols. Retail space in Leeds is set to increase, with Hammerson opening the 42,000 sq m Victoria Gate scheme in autumn The 150m scheme will host a twin arcade, a flagship John Lewis store and a multi-storey car park. The White Rose Centre, owned by Land Securities, is the most successful scheme outside the city centre. The 1m sq ft scheme has a number of anchors including Debenhams, Primark, Marks & Spencer and Sainsbury s and has planning consent to extend further. Leeds rapid growth and increasing prosperity suggests that it will rise up the European retail rankings over the next decade. INVESTMENT MARKETS 2014 was a record year for the Yorkshire investment market, with some 1.5bn transacted, an increase of virtually a quarter (24.9%) on the 2013 figure and the higest total since the financial crisis. This reflects greater confidence among investors in cities outside London and an increased desire to diversify away from the low-yielding City, West End and South East markets. Prime office yields in Leeds currently stand at 5.25%, having seen considerable compression since the immediate aftermath of the crisis, when they reached a high of 7.25%. However, they remain half a percentage point above the 4.75% seen in Cities with similar prime yields include Amsterdam (5.45%) and Lyon (5.50%), although the latter is much closer to its historic low. Indeed, some cities that have comparable property markets to Leeds in some respects, such as Hamburg, are now seeing yields below the level seen in early Admittedly, Leeds is a smaller market and the availability of suitable lot sizes are factors investors consider alongside economic and property market fundamentals. However, market statistics and trends, and its economic prospects suggest that Leeds could see further compression over the coming year, particularly given that base rates are likely to remain at their current levels for the year ahead at least. YORKSHIRE COMMERCIAL PROPERTY INVESTMENT VOLUMES m Source: JLL Sale of 50% stake in Sheffield Meadowhall Urban Europe: Understanding how UK cities compete Leeds Spring 2015

7 PRIME OFFICE YIELDS SELECTED CITIES 14% 12% Current yield Last peak Last trough 10% 8% 6% 4% 2% 0% Stockholm Berlin Hamburg Lyon Copenhagen Dusseldorf Luxembourg Brussels Helsinki Frankfurt Warsaw Leeds Milan Amsterdam Lisbon Prague Rotterdam The Hague Utrecht Madrid Oslo Dublin Barcelona Moscow Budapest Bucharest Source: JLL Q CONCLUSIONS Leeds seems set to outperform the majority of similarly sized Western European cities, with the exception of the Nordic capitals and recovering centres such as Dublin and Madrid. Clearly, London and Paris, by virtue of their size and diversity, are likely to remain at the top of the list for both occupiers and investors and some other UK regional cities have strengths too. However, the overall picture is of a city-region with a rapidly growing economy and an office and retail market that will see accelerating demand and increasing rents over the coming years. The development pipeline appears constrained, which could be an issue in the short term. Leeds main problem, in comparison to other European cities discussed in this report, is a lack of connectivity across Yorkshire and other parts of the North of England. Whilst the wider city-region is among Europe s most populous, the volume of office stock in the commercial centre is rather smaller than might be expected. An increased catchment would help both the leasing and investment markets reach their full potential. It could be argued that Leeds is not acting quite as powerfully as a regional capital in the same way that some of the other cities mentioned in this report are. A stronger commuter pull, and improving skills among some of the city s residents, would help increase the intensity of employment. The Leeds City-Region Local Enterprise Partnership, and the potential for devolution to a West Yorkshire combined authority and/ or mayor, could help achieve these goals while introducing other policies that make the area more attractive to both occupiers and investors. An improved transport network is important (Lyon and Cologne both have substantial metro systems) and Leeds must not be distracted from a longer term resolution on this. The government s plans to improve links across the Pennines as part of a northern powerhouse are a real foundation for future success. After all, the combined populations of Liverpool, Leeds, Manchester and Sheffield would produce one of the five largest city-regions in Europe, a potential world city that could compete more effectively with Paris and London. Nevertheless, Leeds and the wider city region, is currently in a very compelling place and has many reasons to be positive about the future. Urban Europe: Understanding how UK cities compete Leeds Spring

8 Jeff Pearey Lead Director North East Region City Point 29 King Street Leeds LS1 2HL +44 (0) (0) Jon Neale Head of Research UK 30 Warwick Street London W1B 5NH +44 (0) (0)7800 Spring 2015 jll.co.uk COPYRIGHT JONES LANG LASALLE This publication is the sole property of Jones Lang LaSalle IP, Inc. and must not be copied, reproduced or transmitted in any form or by any means, either in whole or in part, without the prior written consent of Jones Lang LaSalle IP, Inc. The information contained in this publication has been obtained from sources generally regarded to be reliable. However, no representation is made, or warranty given, in respect of the accuracy of this information. We would like to be informed of any inaccuracies so that we may correct them. Jones Lang LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication.