Investors are attracted to the extra yield for often marginally increased risk and often better growth potential. Eri Mitsostergiou, European research director at Savills, says the trend towards non-capital cities has been a decade in the making:
“The share of real estate investment activity in non-capital cities has been a trend that has taken a few years to catch on in some countries. Turning the clock back to 2009 and it was clear that capital cities were still the order of the day with the likes of London, Paris, and Madrid catching the attention of investors from across the globe.
“Coming back to the present day however and there is a change in the air. Investment into non-capital cities which, at the end of 2018 sat at 36% (in line with the long-term average), has sprung up to 43% according to figures from Savills recorded at the end of H1 2019. Looking at where this investment is going and there are certainly some countries that stand out from the rest.
“France, whose share of regional investment has stood at an average of 16% in the last five years, has seen investment outside of Paris jump to 28%€ – a rise of 77%. A lack of stock in Paris and its outskirts as well as a compression of yields (now at 3% in the offices market in the heart of the capital) has meant investors are looking further afield for their returns. Areas such as Marseille, Bordeaux and Lille have become increasingly popular with investment levels standing at €662m, €263m and €255m respectively in 2018 and already on track to have an equally successful 2019 with Lille already boasting €456m at the end of H1 2019. “
There is a similar pattern in the UK where investment into the regions now stands at 55% compared to the five-year average of 35%. Standout places such as Edinburgh, Glasgow and Leeds have seen high investment volumes already in H1 2019 (£483m, £451m and £280m) in line with the year before.
Like France, this is the result of high competition for core/core plus product in the capital and record low yields. Likewise in Spain, this figure has jumped from 53% to 65% as investors turn to the likes of Seville, Bilbao, Valencia and Murcia. Savills Aguirre Newman recently announced its third office in Spain in Valencia in response to growing client demand across a diverse range of asset classes.
So, what next? Mitsostergiou explains:
“We believe that secondary cities will remain on investors’ radars (especially the ones with core+/value add or opportunistic strategies), as pricing and activity in the core segment remains extremely competitive. Several of these secondary cities are also supported by positive economic fundamentals and offer a good quality of life at a lower cost.
“According to Oxford Economics five out of the top ten cities with the strongest office-based employment growth forecasts for the next five years are secondary cities including Manchester (2nd), Lyon (4th), Malaga (5th), Gothenburg (8th), Malmo (9th). What remains to be seen is whether there will be even more cities joining them as investors look beyond traditional prime CBD opportunities.”