Undersupply to spark rise in office rents and house prices
AN undersupply of residential development sites and office space created by strong economic growth in Leeds City Region could see average house prices rise 10% by 2021 and Grade A office rents reach £30 per sq ft within three years.
That’s according to real estate advisor Savills and its Spotlight: Leeds Cross Sector report, which highlights a potential housing shortfall of 30,000 units by 2021, driven by an increase in population related to jobs growth and high student retention.
While official data estimates the region needs 90,000 new homes by 2021, Savills has identified just 60,000 in the immediate development pipeline (comprising 16,500 under construction, 19,100 permitted and 24,400 under application).
Already, reduced new supply means average house values are close to or level with their 2008 peak across Leeds City Region, with some hotspots outperforming this. York is currently 14% above its 2008 peak with average values of £231,700, while Leeds is 3% above its peak with average values of £165,600.
By 2019, Savills forecasts that house price growth in the region could start to outperform the rate of growth in London.
Matthew Jones, development director at Savills, said: “House building was damaged by the 2008 recession and although delivery has steadily recovered since 2012, there is now an urgent need for residential development sites to be brought forward. The issue is exacerbated by greenbelt constraints and the cost of developing out major regeneration schemes. It is therefore vital that local authorities across the region work together to meet the housing demand created by the growing economy.”
In terms of the office market, Savills reports that strong take up has been a catalyst for development and 47% of space delivered in Leeds in 2016 is already pre-let. Major deals include Sky Bet acquiring the last remaining space at 6 Wellington Place, Ward Hadaway taking the top floor of 5 Wellington Place and Central Square seeing a further floor leased to RSM.
While the city centre’s new build development pipeline appears robust with 109,000 sq ft due to complete by the end of 2017, this falls far short of the average annual Grade A take up of circa 250,000 sq ft. Supply constraints are starting to push top rents upwards, with Savills expecting them to reach £30 per sq ft by the end of 2019 compared to £28 per sq ft currently.
In particular, the firm highlights the expansion of the tech sector, which is expected to grow by 5.6% over the next five years compared to 2.8% over the last five years, and has added a further dimension to Leeds’ established financial, professional and healthcare sectors. This translates to an additional 6,400 tech based jobs during that timeframe. Additionally, the delivery of the second leg of HS2 into Leeds will deliver further economic stimulus and could create up to 20,000 jobs.
Paul Fairhurst, head of Savills Leeds, said: “Although office rents are rising, Leeds is still great value compared to other big regional cities and we expect ‘north-shoring’ to remain a theme as businesses look to control costs in a more uncertain world. Yet with new accommodation rapidly being absorbed, Leeds City Region ultimately needs to address the demand for more housing and commercial space if it is to continue to attract investment and remain a key UK office market.”
