“High growth…”

In recent decades Cambridge has been among the standout performers for residential property price growth and has a strong claim to be one of the UK’s premier residential markets. Cambridge house prices have risen 241% since 2001 according to Land Registry – just 1% less than London over the same period, and well ahead of the rest of the East of England.

Recent performance in the city has been somewhat weaker, however, despite boosts from the stamp duty holiday. Values in Cambridge rose by 3.8% in the year to June 2021, somewhat lower than the national average of 6.2%.

“…and high costs”

Cambridge’s spectacular historic growth has become a double-edged sword for the city. It is one of the least affordable housing markets in the country, limiting market activity and future value growth.

At their peak in 2018, house prices were an eye-watering 13.5 times greater than local average earnings – higher than London’s figure of 12.3 at the time, and well above the national average of 7.8. This means the city struggles to attract younger and less affluent workers – including key workers. These households often have to find accommodation outside of the city itself, putting greater stress on infrastructure. The greater number of long-distance commutes also has environmental implications. Providing either suitable accommodation in the city or suitable and sustainable transport options into the city must be a priority going forward.

Affordability has been slowly easing

House values in Cambridge had pulled away from the local area significantly after the global financial crisis – a trend mirrored (albeit to a lesser extent) in South and East Cambridgeshire. Cambridge peaked with average values over 2× the national average, rivalling London values in 2016, but they’ve been cooling off over the past several years. This pattern is in contrast to the behaviour of regional neighbours Peterborough and Ipswich, which have seen little shift compared to the national average in over two decades. This shows Cambridge to be in higher demand relative to nearby towns and cities.

Rental opportunities

The stretched affordability in the city has resulted in a strong rental market. Rents have grown 4.1% in the city in the 12 months to August 2021, compared to 1.6% in London. Despite strong rental growth, an affluent population, and a large private rented sector that make up 42% of households in the city, there are currently no established Build to Rent schemes in the city, although there are three schemes in the pipeline, which we expect to deliver around 550 rental homes. This will help increase the tenure and housing options within the city, supporting its continued growth and development.

With accelerating rental demand, Cambridge has become a more attractive proposition for Build to Rent investors. We expect a number of purpose-built rental schemes to be delivered in the city over the next few years.

Productivity city

The economic foundations of Cambridge’s high-performing residential market are solid. Unemployment between 2010 and 2020 averaged only 4.5%, compared to 5.9% nationally. The productivity figures are even more flattering: after 20 years of stellar productivity growth – 24% ahead of the national average – Cambridge had closed its productivity deficit with London from 20% in 2001 to just 4% in 2020. According to Oxford Economics forecasts, Cambridge is due to overtake London in value added per worker in 2022, and achieve a 6% lead by 2030. What’s more, the wider area has also seen recent gains in productivity, pulling up and away from the national average.

This growth, supported by several major office deals, has underscored Cambridge’s appeal to employers. Software provider MathWorks moved into their new 93,000 square foot premises at Cambridge Science Park earlier this year, marking the scheme’s biggest deal for over a decade. And Huawei has reaffirmed its commitment to building a new research and manufacturing facility in Sawston.

However, employers will stop coming to Cambridge if their workers can no longer afford to live there. The city’s economic growth will require the right sorts of homes and workplaces to support it.

The demand for commercial office and laboratory space in Cambridge remains buoyant. The obvious turbulence of 2020 did not dampen take-up, which was broadly in line with the five-year average. 2021 has progressed in a similar way with some significant deals signed, or in an advanced stage, that will further reduce the supply of available space in the city.

Going forward, Cambridge will have a severe lack of new stock under construction, which will conflict with the continued hunger from occupiers of all sizes. Additionally, older stock cannot provide a solution as it may fail to meet occupiers’ ESG requirements, including Carbon net zero. This exacerbates the potential supply ‘crunch’ in the short to medium term.

The result may be a reduction in the attractiveness to occupiers as their requirements cannot be met in the city.

Healthy demand

Throughout 2020, the pandemic focussed occupiers’ and commercial property investors’ attention towards the human health sectors. This appetite and interest has continued throughout 2021 and shows no sign of tailing off. For Cambridge specifically, with a rising interest in human health and wellbeing from the software, mobile and technology sectors, which have a significant presence in Cambridge, it has also created another future layer of demand that will emerge in the next few years. Commercial property investor interest has also continued to grow at an unprecedented rate, where we are aware of new entrants entering the market on an almost weekly basis.

The appetite for Cambridge’s office and laboratory market continues to grow as the city increasingly becomes one of the world leaders in life sciences, including pharmaceuticals, biotechnology and engineering. With a limited supply of commercial property to lease, at present, in the historic core, clusters and centres of excellence in the business, technology and science parks that surround the historic city centre are continuing to drive both occupier and investor demand.

These key drivers behind the investor interest are anticipated to produce significant rental growth predicated by expansion of the occupier base due to huge flows of capital being raised by companies of all scales, the academic spin-out through to the later-stage venture capital. These indicators, combined with a severe shortage of supply in Cambridge, highlights the need and creates the key ingredients for future development growth.

The debate in the past year has been the impact of a shift to more remote working and how this will influence the need for office space in the future. What is clear is that employers and employees value the office for collaboration, mentoring and career advancement, all of which are best met in an office environment. However, the future may result in more companies taking smaller office footprints.

Experimenting with labs

The pandemic also raised investor interest levels in more alternative types of commercial property. In particular, the laboratory market, where occupancy and utilisation rates were considerably higher than in traditional offices through lockdown, increased the interest of investors. This heightened interest was also supported by the considerable level of capital being raised – particularly venture capital – by companies that then require laboratory space.

Of course, despite research and development (R&D) property historically sitting within the offices' use class, there are significant differences between the specification of laboratory and office property. Despite this, it has been interesting to see how quickly investors have become comfortable with the wider types of R&D investment property that caters for very different end-users compared to a traditional office.

_{Read the articles within Cambridge: Thriving on Innovation below.}