Opportunities in the Outer London Real Estate Market

Transcription

1 Research Report Opportunities in the Outer London Real Estate Market December 2013 For Institutional Investors Only

2 Prepared By: Simon Wallace Property Market Research Table of Contents Executive Summary... 1 The Outer London Real Estate Market... 2 Demographic and Economic Drivers... 2 Real Estate Investment Market... 6 Offices... 8 Retail Industrial and logistics Conclusion Important Notes Research & Strategy Team Alternatives and Real Assets Please note certain information in this presentation constitutes forward-looking statements. Due to various risks, uncertainties and assumptions made in our analysis, actual events or results or the actual performance of the markets covered by this presentation report may differ materially from those described. The information herein reflect our current views only, are subject to change, and are not intended to be promissory or relied upon by the reader. There can be no certainty that events will turn out as we have opined herein. 1

3 Executive Summary The potential for real estate investment in the Outer London boroughs is vast. Not only are these 19 boroughs home to five million people, they are major centres of economic activity, supporting two million jobs across a wide spectrum of industries. As a real estate market, Outer London will always be in the shadow of the city centre, nevertheless liquidity and occupier demand is by no means absent. The market is however fragmented, reflecting the geographic and economic construction of Outer London, and therefore there are considerable differences in the level and type of real estate investment activity across the boroughs. The fundamental drivers of real estate demand look set to remain supportive. Over the next ten years, the population of Outer London is forecast to increase by an additional 600,000 people, while the economy is set to be one of the fastest growing regions of the U.K. Aided by improving public transport connections, an additional 210,000 jobs are due to be created over the coming decade, supporting increased demand for both business and retail space across the boroughs. Despite its size and economic outlook, historic and current data shows a considerable real estate yield differential between Central London and the rest of the capital. Although the most prime office buildings in the established office markets such as the Thames Valley may have high levels of global investor interest, enabling yields to fall to levels similar to parts of Central London, in general this is not the case. With investors currently increasingly attracted by the relative pricing of the major regional markets, a higher yield, evident liquidity and strong outlook for economic growth could encourage more investors to also look for investment opportunities across the Outer London boroughs. With over 60 million sq ft of office space, parts of Outer London have historically provided occupiers with a cheaper alternative to the city centre. The market as a whole has been through a period of relative decline, and will face particular challenges going forward as back office and public sector demand remains weak. Where office hubs with critical mass have been established, a forecast increase in office based jobs should support demand providing this is met by good quality space. As such, the Outer London office markets may continue to consolidate towards the Thames Valley, although markets like Richmond, Kingston and Wimbledon could also provide opportunities, while the proposed regeneration of Croydon may re-establish the centre as a major alternative market. Although overshadowed by the West End, there is also a considerable retailing offer in Outer London, from regionally dominant malls to numerous and fragmented local high streets. Offering residents a convenient shopping experience to the centre of the city, and retailers with access to a densely populated local catchment, Outer London has so far proved relatively defensive to retail structural changes. Given projections of an increasing resident population and an above average increase in spend potential, many parts of Outer London still offers attractive retail investment opportunities. Finally, although Outer London s industrial stock has generally been shrinking over recent decades, this has not been universal across Outer London, and in part is starting to be reversed by the increased need for logistics operators to locate close to the large population centres. Although the eastern parts of Outer London have typically seen lower levels of commercial real estate activity, lower land prices and excellent transport links could see boroughs such as Bexley and Barking & Dagenham become major centres of industrial and logistics activity. 1

4 The Outer London Real Estate Market Outer London is a large, varied but somewhat under-researched part of the U.K. commercial property market. Well provisioned with residential stock, the area also contains well establish office markets in the likes of Croydon and the Thames Valley, numerous retail locations including the country s first stand-alone shopping centre at Brent Cross, and a wide range of logistics hubs with easy access to the city s international airports and domestic transport network. While transaction volumes are a fraction of the level recorded in the highly liquid Central London market, Outer London does not fail to attract investors, recording annual commercial property sales above those in the major regional markets such as Birmingham, Manchester and Glasgow. Demographic and Economic Drivers Outer London sits across a geographic area of 1,250 sq km, broadly covering the space from the Inner London road loop of the North and South Circular out to the M25 motorway that encircles Greater London. Consisting of 19 London boroughs, Outer London is home to more than 60% of London residents (5 million people). The population of each borough ranges from the largest, Croydon, at 370,000 people to Kingston upon Thames at 164,000, with most boroughs similar in size to a large regional city, and all bar three ranked within the top 100 U.K. local authorities by population size. 1 Map of Outer London Boroughs Source: Office of National Statistics, October 2013 Employment in London is clustered within Inner London, particularly Westminster, the City of London and Camden, with these three boroughs alone containing circa 1.4 million jobs, almost 30% of the Greater London total. Although employment densities are lower in Outer London, they do however remain major centres of work. The largest centres tend to 1 Office of National Statistics,

5 be to the west of Central London, with Hillingdon supporting 200,000 jobs and seven other boroughs containing more than 100,000 jobs. In total, there are around 2.0 million jobs located in the Outer London boroughs, supporting demand for business space of varying uses. 2 Greater London Employment (2011) 800, , , , , , , ,000 0 Outer London Inner london Source: Office of National Statistics, Note: H&F = Hammersmith and Fulham, K&C = Kensington and Chelsea The demand for the type of business space reflects in part the economic structure of Outer London. This structure differs greatly from Central London. The inner part of the capital is a centre of international business, with half of all jobs in the finance and business services sector, whereas Outer London is more mixed and more domestically focused, with a greater share of jobs provided by the public sector, retailing and logistics. This pattern of diversity is present across the majority of Outer boroughs, although clusters are present such as: logistics in and around Heathrow Airport (Hillingdon), media in Chiswick Park (Hounslow), science and technology along the M4 Corridor (Hounslow), financial and insurance services in Croydon and Bromley and manufacturing in the Upper Lea Valley (Enfield). Employment Structure (2011) Outer London Inner London Source: Office of National Statistics, 2013 % Reflecting the economic structure, output per employee in these boroughs tends to be lower than Inner London, but above the country average as a whole, in part benefitting from close proximity to Central London one of the world s most economically dynamic locations. The Outer London boroughs do not act in isolation, with business and people flowing freely throughout the city and the surrounding regions, particularly in the direction of Central London. 2 Oxford Economics, ONS,

6 After a period of decline during the 1980s, the population of Outer London has been growing for the past two decades, and accelerating in recent years. The population has increased by almost 800,000 over the past two decades to around five million today, and is set to rise by another 600,000 during the next ten years growing at a faster pace than the national average and at the same rate as Inner London. 3 This rise in population will not only increase demand for housing but will also lead to increased requirements across the commercial property sector, particularly retail and leisure within the Outer London boroughs. Outer London Population Index (1992 = 100) Index Outer London Population (RHS) Outer London United Kingdom Million f=forecast Source: Office of National Statistics, Oxford Economics, 2013 The transport network supports economic activity and helps to shape occupier location decisions. In general the Outer London boroughs tend to have considerably better road access than the city centre, with closer links to the M25 orbital motorway and the national motorway network. Parts of western Outer London also derive considerable benefit from their close proximity to Heathrow Airport, and the economic benefits associated with being located next to one of the world s largest airport hubs. The future of Heathrow remains in question, and should the airport not be allowed to expand, or an alternative hub airport built, this would likely have major negative implications for economic activity and commercial property demand in these western boroughs. More so than other parts of the country, public transport is a key driver of regional accessibility in the capital, with factors such as population density allowing for greater provision. In there were 279 bus journeys per head in London, compared to 83 across the country as a whole, resulting in 45% of all bus journeys taking place in the capital. 4 Like most major metropolitan areas, the public transport network is concentrated towards and within the centre of the city, with a number of arteries running into the outer boroughs. Inter-borough connections between the outer areas have historically been relatively poor, often requiring travel by car / bus or a rail journey via Central London, and reducing the total volume of potential employees and customers accessible to these outer areas. This has been somewhat improved in recent years following the completion of the London Overground network which provides an orbital route around Central London, with spurs south to Croydon, north to Watford via Harrow, east to Barking and west to Richmond. Not all of the Outer London boroughs are equally served by the public transport network, with the north and west of Greater London better served than the east and south. The London Borough of Brent (north-west), for example, is served by four Underground lines, 3 Oxford Economics, November ONS, Annual Bus Statistics, September

7 the Overground network and mainline services, while Bexley (south-east) contains only connections to less frequent mainline services. Over the next decade Greater London is set to see significant improvements to its transport system, with upgrades to existing lines, and the opening of Europe s largest infrastructure project with the new east to west Crossrail line. As shown in the table below, of the major rail improvements most will, to varying degrees, have an impact upon accessibility in the Outer London boroughs. In general these improved transport links should help to increase the relative accessibility and attractiveness of the Outer London boroughs through which they pass boosting real estate demand. However, this will not be the case for all occupiers and locations. Where access to Central London is significantly improved, consumers or employees may substitute their local market for the more extensive offering of the city centre. This effect should not be overstated, but ought to be assessed on a case by case basis. Planned London Rail Improvements Name Comment Planned Open Outer London Northern Line Upgrade Great Western Electrification Crossrail Thameslink Upgrade Metropolitan Line Upgrade Circle and Hammersmith & City Upgrade District Line Upgrade Northern Line Extension High Speed 2 (Phase 1) High Speed 2 (Phase 2) Increased capacity, frequency and lower journey times from Barnet in the north to Morden in the south. Reduced journey times between London Paddington and Cardiff New east-west metro line. Largest infrastructure project in Europe. Major increase in capacity and reduced journey times from Outer London boroughs to the city centre. Increased capacity, frequency and lower journey times on services running north south across London to areas outside the capital. Increased capacity, frequency and lower journey times on services running north-west from the City of London to beyond Greater London. Increased capacity on these lines running mainly throughout Inner London boroughs one stop in Outer London borough of Barking & Dagenham. Increase in capacity on line running Ealing, Richmond and Merton into Central London. New stations at Nine Elms and the Battersea regeneration area. High speed railway line from Central London to Birmingham. Line extended to Manchester and Leeds. Possible spur / interchange to Heathrow Airport YES 2017 NO 2018 YES 2018 YES 2018 YES 2018 YES 2018 YES 2020 NO 2026 NO 2032 YES* Crossrail 2 New line running through Central London from outer 2030s YES south-west to outer north / north-east boroughs. Source: Transport for London, Department for Transport, Deutsche Asset & Wealth Management, 2013 Note: *Heathrow. 5

8 Looking forward over the coming ten years, GDP growth in Outer London is forecast to be one of the fastest growing of the U.K. regions. With the economy projected to grow by 26% over the decade to 2023, these boroughs are expected to host an additional 210,000 jobs by the end period not only supporting additional business space demand, this rise in employment (both within the borough and of residents) should also increase consumption and retail spending. The changing structure of retail does not guarantee that the additional spend potential will be captured at a local level, however as shown later in this report, all Outer London boroughs are set to require additional floorspace over the coming 25 years, despite the projected shift of sales online. 5 Cumulative GDP Growth (2013 to 2023f) 2014f 2015f 2016f 2017f 2018f 2019f 2020f 2021f 2022f 2023f Inner London South East East Outer London United Kingdom South West East Midlands North West West Midlands Yorkshire N. Ireland Wales Scotland North East f=forecast Source: Oxford Economics, October 2013 % Real Estate Investment Market Commercial property transactions in Outer London have picked up in recent quarters, rising back to their long run average. Over the last ten years, the volume of commercial property investment in Outer London has averaged 1.7 billion per annum. Although this level of activity is well below that of Central London, it is of a similar size to the other U.K. regions such as Scotland and the South East, and larger than the largest regional city markets of Manchester and Birmingham. 6 All Commercial Property Transaction Volumes ( billion, 10-Year Average) Source: Real Capital Analytics, Deutsche Asset & Wealth Management, Experian, October 2013, Note = Gross addition 6 Real Capital Analytics, October

9 Reflecting occupier demand for business and retail space, commercial transaction activity by sector and location has not been uniform across the region. Investment has tended to be most active to the west, along the established Thames Valley market in boroughs such as Hillingdon, Hounslow and Ealing. However, there are also large investment areas in the north (Barnet and Enfield), south (Kingston and Croydon) and east (Bexley). Commercial property transaction activity has tended to be particularly sparse across the northeast of the capital. Due in part to low levels of investible stock, but also potentially showing a lack of investor insight, the three adjoining boroughs of Barking & Dagenham, Waltham Forest and Redbridge have over the past ten years averaged annual commercial sales of just 35m combined. 7 Retail has typically been the most traded commercial property sector in Outer London, accounting for almost 40% of all deals done, followed by offices with a similar share and finally industrial and logistics with the final 20%. Although retail deals have generally been more prevalent across Outer London, the office market has been particularly biased towards the Thames Valley office markets of Hillingdon and Hounslow accounting for almost 60% of deals in these boroughs. Given the close proximity of Heathrow Airport, Hounslow has tended to be the largest investment market for industrial and logistics transactions, while as a share the gateway boroughs of Enfield and Bexley have recorded around 50% of all sales in this sector. 8 Outer London Borough Transaction Volumes ( million, 10-Year Average) 250 Office Retail Industrial Outer London Borough Average Source: Real Capital Analytics, Deutsche Asset & Wealth Management, 2013 Compared to Central London, the Outer London boroughs offer a considerable yield premium, more akin to the larger cities of the South East and major regional markets. Although the most prime office buildings in the Thames Valley such as Chiswick Park may have high levels of global investor interest, enabling yields to fall to levels similar to parts of Central London, in general this is not the case. As shown by the IPD figures below, the average office yield in Merton and Hillingdon were recorded at 7% at the end of 2012 similar to markets such as Edinburgh, Bristol and Manchester while Hounslow, Croydon and Bromley were at 8% - similar to smaller regional cities such as Sheffield, Cardiff and Nottingham. 9 There may be some concerns over the number of observations recorded by the IPD Key Cities Index for the individual locations. When viewed over a twenty year period the pattern does tends to hold, although the differential between the Outer London boroughs and Inner London is less marked, reflecting the current low yield of Central London real estate. 7 Real Capital Analytics, Real Capital Analytics, IPD Key Cities,

10 With investors currently increasingly attracted by the relative pricing of the major regional markets, a higher yield, evident liquidity and the above average outlook for economic growth could encourage more investors to look for investment opportunities across the Outer London boroughs. IPD Office Initial Yield in 2012 (%) Inner London Outer London South East Rest of UK 20-yr Average Source: IPD Key Cities, 2013 This trend is repeated across the retail sector, but is not evident for industrial properties reflecting in part the reduced presence of industrial real estate within the inner part of the city. Over the past twenty years, retail units in Outer London have recorded an average initial yield of 6.1%, compared to 5.3% in Inner London, while industrial properties have averaged 7.1% in both parts of the capital. 10 Offices Outer London contains an estimated 61 million sq ft of office space, similar to the Central London office markets of Westminster or the City of London, and more than the total for either the West Midlands or Greater Manchester. 11 The office market has experienced a period of relative decline over the past two decades. Although there remain areas of significant office stock, particularly along the Thames Valley, over half of boroughs have experienced reduced levels of space over the past ten years as the drivers of demand have shifted and the competitive advantage of these locations has fallen. As such, certain office markets may be going through a period of structural decline, never returning as locations of substantial office activity. However, this is not the outlook for all Outer London office markets, with projections of growing office employment set to support large-scale office demand in certain locations. Net Change in Office Floor Space from 2002 to 2012 (Million sq ft) Total Change in Space % Change (RHS) 30% 20% 10% 0.0 0% % -20% % Source: VOA, 2012, Deutsche Asset & Wealth Management, IPD Key Cities, VOA,

11 A recent report produced for the Greater London Authority highlighted a number of key factors driving the reduction in Outer London office demand. 12 These included: - The reduced cost differential between office space in Inner and Outer London - The increased use of outsourcing to regional UK cities and abroad - Reduced number of back office functions - Falling public sector demand - Poor quality office accommodation Some of these factors may reduce over the coming years. For example, with rents rising sharply in the West End and rental growth projected for the City of London from 2014 onwards, the cost differential is likely to grow. 13 Furthermore, in locations such as Croydon, cheaper, large floor plate buildings have been attractive to central government departments looking to relocate to areas that also have quick access to the government in Central London. Nonetheless, many of the structural changes in the economy are unlikely to be reversed soon technology is likely to increasingly support outsourcing and reduce back office requirements, while local government finances are set to remain constrained well into the second half of the decade. In the parts of the Outer London office market where a critical mass of offices has been built, occupiers continue to take large volumes of space, particularly in those boroughs that fall into the established Thames Valley submarket, and, despite the evident reduction in floor space, within the Croydon office cluster. Over the past decade, total office take-up in the Outer London boroughs has averaged around 2.7 million sq ft per annum; 14 equivalent to slightly over a fifth of the level recorded in Central London, and well above the annual average (1.0 million sq ft) for the major regional city office markets Despite the negative trend in some outer boroughs as a whole, there has also been little evidence to suggest that the relative share of take-up in the Outer London boroughs has fallen significantly over the past decade. Reflecting the established Thames Valley office market and supported by transport links such as the M4 motorway and access to Heathrow Airport, the western boroughs of Hounslow, Hillingdon and Ealing, have historically accounted for almost 45% of all office take-up in Outer London. Led by Hounslow, total space in these boroughs has increased by nearly 600,000 sq ft over the past decade, and in total hold around a third of all Outer London office space. 17 In addition to traditional town centre office locations, these boroughs have tended to offer occupiers an alternative to Central London with modern and large floor-plate office parks such as Bedfont Lakes and Chiswick Park. Although some way away from being a Mini Manhattan as it was once dubbed, the tower cluster in Croydon remains a large alternative office location. With fast rail links into the city centre, and nearby access to Gatwick Airport, Croydon has proved popular with occupiers, recording annual take-up of almost 250,000 sq ft per annum over the past decade. Croydon has been particularly popular with the public sector, with central government departments continuing to take space in the borough as spending cuts have forced departments to relocate to cheaper locations outside Westminster. In recent years the appeal of Croydon as a location has been somewhat diminished by an aging office stock and poor London Office Policy Review, Deutsche Asset & Wealth Management, July CoStar Focus, October PMA, CBRE, October Manchester, Birmingham, Edinburgh and Glasgow 17 VOA, CoStar Focus, October

12 quality of public realm. This has been reflected in a level of take-up low relative to the available office stock, and the subsequent fall in total space as this stock has been withdrawn. However, the town is now undergoing a period of major regeneration which could see new residential towers, the Hammerson / Westfield redevelopment of the main shopping district and the building of a mixed use development (including 1.5 million sq ft of new office space) at Ruskin Square adjacent to East Croydon station the busiest train station in Outer London and thirteenth busiest in the United Kingdom. 19 Croydon and the three Thames Valley office markets have accounted for 52% of annual take-up over the past decade, whilst holding on average 44% of total office stock. 20 Although the other boroughs contain pockets of office space, such as those found in Richmond, Kingston and Wimbledon town centres, they do not tend to have a critical mass needed to establish an office cluster particularly eastern boroughs such as Barking and Dagenham, Waltham Forest and Redbridge. Outer London Office Market Take-Up (Million sq ft, 10-Year Average) Source: CoStar Focus, October 2013 Looking forward, increased office based employment will be a key driver of office take-up. In part, rising office based employment will be dictated by the availability of office stock, although in some of the smaller locations, rising demand may prompt a development response. According to the latest forecasts from Oxford Economics, all boroughs will experience an increase in office employment over the next decade. Two of the Thames Valley boroughs are likely to consolidate their position as major office markets over the next ten years, with Hounslow (2.3%) and Hillingdon (1.7%) each recording above average (1.5%) annual office employment growth over the period, adding an additional 21,000 office based employees to the boroughs. Ealing is set to slightly underperform, growing 1.3% per annum, but is still set to add an additional 5,000 office jobs. All three boroughs will benefit from improved Crossrail access and as shown in the chart below, the development pipeline in Ealing and Hillingdon is large enough to adequately accommodate the additional increase in headcount. The development pipeline in Hounslow at around 350 sq ft per new job could be larger than requirements, however, and particularly in the current economic and debt climate, the risk of planned developments not occurring is high. 21 In contrast to the Thames Valley, Croydon is forecast to remain a major underperformer, with office employment to grow by just 0.5% per annum over this period. 22 In part this low 19 Office of Rail Regulation, CoStar Focus, October Roger Tym & Partners, 2012, Oxford Economics, September Oxford Economics, September

13 level of growth reflects the high proportion of current office employment being in the public sector and central government. If planned office and public realm developments are realised, this forecast would suggest the possibility of rising vacancy in the Croydon market, however a marked realignment of the town could also attract office occupiers above the level shown in the latest forecasts. Outside of the main office markets, the three smaller markets in Richmond, Kingston and Wimbledon are expected to be areas of high office employment growth each growing by over 2% and adding 6,000 to 7,000 additional office jobs over the coming decade. 23 To accommodate office employment rising by a quarter there is the potential for considerable demand for additional office stock in these boroughs. The supply pipeline in these boroughs currently looks thin, particularly in Merton and Richmond, which may limit job creation, but also could lead to an undersupply of space relative to demand, thereby lowering vacancy and supporting rents over the coming decade. Across the other boroughs, Brent and Barnet are both due to see fairly strong office employment growth of between 5,000 and 6,000 over the next decade, but also have large office pipelines, which 600 and 1,100 sq ft per new office job respectively which could lead to an oversupply in these markets if the space is built without securing new occupiers. The economic structure of the eastern boroughs is expected to lead to only modest levels of office job growth over the next decade. In most locations this is accompanied by a thin development pipeline. The two exceptions are Barking & Dagenham and Greenwich. As shown in the chart below, there is currently a large disconnect in these locations, with far too few office jobs projected to sustain the proposed pipeline. Nevertheless, if this space is delivered it could lead to a break in the structure of the local economy, establishing a new office hub, and encouraging the migration of additional office jobs into the area. This is clearly evident with the proposed regeneration of Greenwich Peninsular, which if fully delivered would see an additional 3.5 million sq ft of commercial property space, transforming a large area of land sitting opposite the Canary Wharf financial district. 25 Employment Outlook and Supply/Demand Balance (2013 to 2023f) 24 12,000 New Office Jobs Gross Development Pipeline sq ft per New Office Job (RHS) 1,200 10,000 8,000 6,000 4,000 2,000 1, Potential Oversupply 0 0 f=forecast Source: Roger Tym & Partners, 2012, Oxford Economics, Deutsche Asset & Wealth Management, 2013 Note: Right hand side has been rescaled and thereby excludes Greenwich at 1,983 sq ft per job. 23 Oxford Economics, September Roger Tym & Partners, 2012, Oxford Economics, September greenwichpeninsula.co.uk,

14 Retail Central London is one of the largest retail locations in the world, attracting global visitors and retailers to the famous shopping streets of the West End. However, many London residents prefer less busy and more convenient local shopping in Outer London. Across the country, many of these smaller shopping locations have been vulnerable to the economic downturn and the structural change of sales migrating online, as retailers concentrate on locations with the highest sales productivity. However in London factors such as population density and transport constraints have helped to support smaller shopping venues more than other areas of the United Kingdom. According to the Local Data Company, high street vacancies in London were 9.4% in mid-2013, the lowest in the country and compared to a national average of 14.1%. 26 Although Outer London retail locations will never be able to offer the Experience of Central London, for many residents they offer much greater convenience over the centre of the city. Comparison goods spend within the Outer London boroughs comes predominantly from residents commuter and tourists provide some additional spend, although far less than Inner London. The large resident population of Outer London sustains a substantial volume of retail spending within the nineteen boroughs. According to recent estimates from Experian, the Outer London boroughs recorded 7.8 billion of comparison good expenditure during 2011 more than double the level of spend within the West End. In addition to comparison goods, these locations are also home to substantial volumes of convenience and leisure spend. 27 Of the nineteen boroughs, six were judged to have seen total comparison good expenditure in excess of 500 million during 2011, which would place these boroughs within the Top 50 retail locations as measured by CACI. At almost 800 million of comparison spend, Barnet (location of Brent Cross Shopping Centre) would rank 23 rd nationally, similar to cities such as Brighton and Cardiff. 28 Comparison Good Expenditure in Outer London Boroughs ( billion, 2011) Top 50 UK Retail Locations by Spend Source: Outer London Commission, Experian, October 2013, CACI, 2012 The map below highlights the large number of local retail locations dotted across London. In addition to the many local and often fragmented centres, the Outer London boroughs include one large Regional standalone mall (Brent Cross) in the north, two Regional town centres (Kingston, and Croydon) to the south, as well as twelve Major District centres and ten District centres. 26 Local Data Company, September Outer London Commission, Experian, October CACI,

15 Map of Major London Retail Locations Source: CBRE, September 2013 Looking forward, all parts of Greater London are expected to see rising retail sales. Supported by a rising population and increasing affluence, the value of retail sales are projected to grow by an average of 2.9% per annum over the coming decade. 29 Some of this additional spend will be diverted online, and as such, lowering the overall pace of growth. Even so, according to research from Experian, the Outer London boroughs will require additional retail space over the coming 25 years. According to this analysis, the nineteen boroughs will see requirements for an additional 7 million square feet of comparison good retailing space with convenience and leisure space also required in addition. Some of these requirements will be met by currently vacant space; however these projections suggest that the Outer London boroughs will likely require the development of additional retail space over the coming decades. 30 The largest absolute increases in required comparison good floor space are expected in those locations already attracting the greatest volumes of retail spending a trend witnessed over the country as a whole in recent decades. Hillingdon, where retailing is currently centred on Uxbridge, is set to require the greatest volume of additional space 900,000 sq ft by 2036 with 800,000 sq ft needed in Kingston and Barnet. 31 Although locations such as Barking & Dagenham are expected to see a small increase in required comparison good floor space, and could see higher convenience requirements, these boroughs are not expected to become major retailing destinations, and therefore may fall in importance relative to other Outer London retail centres. 29 Oxford Economics, September Outer London Commission, Experian, October Outer London Commission, Experian, October

16 Required Comparison Good Floor Space by Borough from 2011 to 2036 (Million Sq ft) f=forecast Source: Outer London Commission, Experian, October 2013 Note: Gross requirement, Baseline Scenario In addition to the requirements for comparison good space, Outer London boroughs are also likely to see additional demand for both convenience goods space, and restaurant and leisure facilities. The large supermarkets have been a major driver of convenience spending in recent years particularly in London. In the last financial year, Tesco alone opened 146 of its smaller format Extra and One-Stop stores, and had a total of around 2,200 of these units, covering 4.5 million sq ft of space. 32 With convenience stores increasingly being used as drop off and storage points for online purchases, convenience spend is set to be an important driver of local retail unit demand. If this additional demand is not met by the development pipeline it is likely to support real rental growth in some Outer London locations. Some of the additional demand for retail space will be met by currently vacant units, however not all these units will be fit for purpose, i.e. in the wrong location or sub-optimally sized. Where development does occur, the impact will not be isolated to a single borough, particularly large-scale projects such as the planned Hammerson-Westfield redevelopment of Croydon town centre, or the creation of a new town centre around Brent Cross shopping centre. The additional spend will also be captured by an increased offering outside of the Outer London boroughs. Most likely this will come from a further strengthening of the city centre, as international retailers continue to be attracted to the location while further improvements to retail, leisure and public realm spaces are made, particularly around the major Crossrail stations such as Tottenham Court Road and Farringdon. Some of the large standalone malls of the South East are also looking to expand, for example both Lakeside and Bluewater which lie close to the east of Greater London (but not within Outer London) have received planning permission for major expansion programmes. Even when considering the current availability of vacant space, the shift of spend online and the potential development pipeline, many parts of Outer London will still offer investors attractive retail opportunities to take advantage of the rapidly increasing resident population and above average rises in spend potential. In addition to the small number of regionally dominant locations such as Brent Cross, Kingston and Croydon, well run district centres will continue to attract footfall and retailers, offering a local centre with greater convenience than the city centre, while smaller locations may also offer higher risk in- 32 Tesco, Javelin,

17 vestment opportunities, with the possibility of consolidating fragmented high street locations or developing a niche retail location meeting the needs of the immediate catchment. Industrial and logistics Greater London has experienced a sharp reduction in industrial space over the past decade. According to the Valuation Office Agency space in this sector has fallen by 1.9% per annum since 2002, a far faster rate than the 0.5% recorded across the United Kingdom as a whole. 33 In percentage and absolute terms, the reduction in industrial and logistics space has been most marked in Inner London particularly in recently gentrified areas such as Hackney, Islington and Tower Hamlets. The rate of decline has been slower in Outer London, declining by 1.0% per annum, and in some locations such as Barking & Dagenham and Bromley, has actually risen over this ten year period. In 2012 Outer London held 68% of all industrial and logistics space in Greater London, up from 63% in Although traditional industrial space has generally been in decline over the past decade, and is set to continue to face similar challenges going forward, this will not be the case in all parts of London, in locations where high quality industrial space can meet the needs of hi-tech industries that want to be located close to the London skill base and access to finance. One area of particular note is the development of the London Sustainable Industries Park at Dagenham Docks, which when complete is due to deliver 1.3 million sq ft of BREEAM Excellent business space. 35 Industrial Stock (Million Sq ft) Floorspace % Change (RHS) Outer London Average Change 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% -2.5% -3.0% -3.5% Source: VOA, 2013 Note: Gross requirement Even though the terms Industrial space and Logistics space is often used interchangeably, it has been evident in recent years that the two sectors are diverging, with the continued reduction in manufacturing activity being mirrored by greater volumes of specialist logistics space. Looking forward, this trend is set to continue, and as such the driver of demand for London sheds space will principally be the logistics sector. Over the next five years, manufacturing employment in the capital is predicted to fall in every Outer London borough 33 VOA, VOA, London Sustainable Industries Park,

18 while employment in transport and storage is due to grow across all London boroughs, rising at an annual rate of 1.6%. 36 In part this increase in transport and storage employment will be led by the growth of online retailing. Although this has not been wholly positive for logistics demand, particularly where steps from the supply chain have been removed, it has clearly increased the need for efficient space where goods can be distributed as quickly and as cost effectively as possible. The implication of this has been a shift towards ever larger and more sophisticated warehouses. Demand for large centres has been primarily driven by retailers both food and non-food as they have responded to consumer demand. In addition to specialists and Pure-play retailers, supermarkets as well as fashion retailers have continued to expand their online retailing offer. However, like Pure-play, order fulfilment and guaranteed delivery times are still important and a challenge. As online sales grow, and shorter (even same day) delivery times become increasingly viable, the need for logistics operators to be located close to major population will become ever more important. This has been evident in the United States, where despite sales tax implications; large e-tailers such as Amazon have taken increasing amounts of warehouse space close to major conurbations, building automated Fulfilment centres to assist speed of delivery. With a larger share of U.K. retail sales going online than in the U.S. this model is also being adopted here particularly in the highly populated London market - and explains the emergence of Regional Distribution Centres (RDCs). 37 RDCs have given retailers greater stock control and have improved efficiency by ensuring that goods can be held and re-distributed to the regional hinterland with lower dwell times. More recently, the market is also witnessing the emergence of dark stores in response to online sales. Dark stores are satellite warehouses (100,000 sq ft or less) which are used specifically by the supermarkets as pick up centres in order to assist nearby shops where staff cannot keep up with orders by internet customers in their catchment. Sainsbury s has announced that it is to open its first dark store, in east London, to meet demand for its growing online grocery arm. The online fulfilment centre will open in Bromley-By-Bow, east London within the next few years. 38 The provision of transport infrastructure will have a large impact upon logistics location decisions, as future demand is drawn to those locations that offer excellent access to Greater London s orbital road networks, and to the country s major distribution hubs particularly the National Distribution Centres (NDC) of the Midlands, Heathrow Airport and the ports of South East England. While supporting demand for logistics space, the changing structure of retailing is also creating opportunities for infrastructure investment in locations in and around London. Two transport schemes of particular note are the London Gateway and the development of The Howbury Park Rail Freight Interchange. The first phase of London Gateway opened in early 2013, marking the start of major increase in port capacity to the east of Greater London with a capacity of 3.5 million TEUs 39. The Howbury Park Rail Freight Interchange is a planned development of a large multi-purpose interchange and distribution centre linked to the national rail and trunk road system. Located in Bexley, this Prolo- 36 Oxford Economics, November Centre for Retail Research, Reuters, October Twenty-foot equivalent unit (TEU) used to describe a typical container on a container ship. 16

19 gis development will deliver an additional 2.1 million square feet of modern space into this part of outer South East London. 40 The development of logistics space close to urban areas will also be dependent upon the cost and availability of large plot development land. In urban areas, particularly parts of Greater London, this is likely to prove prohibitive. Using house price data as a proxy this suggests that there would be a marked difference in development costs between boroughs, with the west and north western boroughs considerably more expensive than those in the east. Anecdotally the availability of land in the Outer Boroughs is greatest in the east, particularly the large areas of brownfield space along the Thames Gateway (Barking and Dagenham, Bexley, Havering and Greenwich). Average House Prices ( 000) Average House Price Outer London Average* Source: Land Registry, June 2013 Note: *Unweighted Weighing up the two considerations of transport links and development costs suggests that in Outer London the half crescent of boroughs running east from Enfield in the north to Bromley in the south are the most likely locations for expanded logistics activity. Unless the future of the airport is seriously brought into question, the area surrounding Heathrow, particularly Hillingdon and western parts of Hounslow, should remain a major centre for logistics activity; however boroughs such as Ealing, Kingston and Brent may see a relative reduction in demand and development given their location and the potential cost of developing modern space in these boroughs. Conclusion Often overshadowed by Central London, the fragmented Outer London market has historically been an under-researched part of the U.K. real estate market. However, with yields in the centre of the capital moving towards historic lows, and the Outer London boroughs providing a yield premium and the prospect of above average population and economic growth, these 19 boroughs offer investors an important source of alternative investment. Demand for commercial real estate space will not be uniform, with some locations more suited to certain sectors and therefore to fully identify and capture outperformance in this market will require specialist localised knowledge. Nonetheless, as a whole, Outer London offers significant return potential and should therefore be on the radar of serious real estate investors. 40 Prologis,

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