Back at the start of the year things were looking bright for both London’s commercial markets and those of the UK’s regional cities: due to Brexit the UK was lagging behind most European cities in terms of the occupational markets, giving room for future growth.

Obviously things have changed significantly since January and those growth expectations have disappeared, at least in the short term; the issue is now about how and when the markets can get back to the place they were in at the start of the year. There’s also a question about any recovery favouring London – long perceived as a ‘safe haven’ for investors – over other UK cities.

It’s worth first remembering what a polarised situation the UK is in compared with many other markets. Unlike, for instance, Berlin in Germany, London isn’t just a ‘first among equals’ property market, it completely dominates the UK.

Take central London’s office investment turnover for example. This hit £20 billion in 2019, the equivalent of all office transactions outside London combined. Likewise, the 11 million sq ft of office space let in the capital last year is roughly the same as all that taken outside of it.

In the short term, I expect London will win out in a flight to safety over the next few months. For non-domestic investors in particular, assuming you can find an asset, the security of buying in a very familiar market, where you’re more guaranteed to be able to sell quickly if liquidity becomes an issue, will be too good to ignore. However, the other UK cities have many advantages going for them which will reassert themselves in the mid-term.

Firstly, there’s much less competition in the regions as international buyers are generally less dominant. Just over 30 per cent of purchases outside London last year were by non-domestic buyers, opposed to around 60 per cent in London.

Some international investors are undoubtedly put off investing in the regions by the liquidity question.  However, the lack of competition means that pricing is more attractive than in London, often for similar or the same covenants as they might get in the capital.

The regional office occupational story is as positive as it is in central London: constrained development for many years has led to low levels of availability, and even given a likely increase in subletting due to the current situation, the medium term outlook for rental growth shouldn’t change dramatically.

Furthermore,  some corporate occupiers might be more likely to adopt ‘hub and spoke’ office networks, with greater presences in regional cities to capture new young workers coming out through local universities who don’t want to pay London’s inflated cost of living. This again strengthens the regional office outlook beyond 2020.

Beyond offices, one sector that has seen heightened demand in the past two months is logistics. Given most industrial real estate is located outside London, and future demand is only going to increase again with a stronger focus on local distribution networks, this could also boost the regional investment recovery.

In summary then, London is likely to initially recover first, but swiftly afterwards the attractions of the regions will be remembered and we’ll see investor interest turn in their direction once again.

Further information

Savills Covid-19 Resource Hub