UK Cross Sector – Spring 2019

SPOTLIGHT Newcastle: A north Savills Research eastern powerhouse

Mixed use development opportunities Emerging tech sector Industrial demand Overview Overview

Graeme Peacock Challenges and opportunities significantly more affordable than the Figure 1 Residential development has increased As an affordable location that is attracting public and private investment, most expensive core city, Bristol, which rapidly and is now exceeding local plan targets new opportunities are beginning to emerge in Newcastle has a house price to earnings ratio of 9.11. The city has also benefitted from 3,000 Newcastle is one of the fastest growing In the future, Newcastle will benefit The city in context pro-development local government. cities in the UK, with 21,000 new from the North of Tyne devolution Comparison with the other nine Following the downturn during the homes and 14,000 new jobs expected deal. Implemented in 2018, the deal UK core cities and additional strong global financial crisis, housing delivery 2,500 over the next 12 years. The city’s will bring Newcastle, North regional centres such as Oxford, has risen strongly from 2013-14, and for population is projected to reach and Northumberland together under Reading and Edinburgh demonstrates the last two years, new housebuilding 2,000 over 310,000 by 2030, an increase of a Mayor, and will bring an extra £600 Newcastle’s strengths, and the areas has been equivalent to 2% of existing 6% from 2016, while the city region million of investment to the region over where the city faces challenges. housing stock. None of the other population is projected to be 2.75 the next 30 years. The city is becoming more cities in the comparison group have a 1,500 million by 2030. The powers devolved to the new prosperous, with earnings growth of housebuilding rate higher than 1.6% of The combined urban cores of Combined Authority will include land 26% between 2007 and 2017. Of the existing stock. 1,000 and Newcastle are the key acquisition and disposal, and the ability comparator cities, Leeds is the closest Although Newcastle has a low Net Additional Dwellings Net Additional employment area in the North East, to establish Mayoral Development with earnings growth of 22% over the proportion of the population educated to and the main driver of the city region Corporations to serve North of Tyne’s same period. NVQ4 or above (33.8%), it does manage 500 growth. It benefits from high levels housing and regeneration ambitions. Rising earnings combined with to retain a high proportion of graduates, of accessibility and connectivity; Four Neighbourhood Opportunity moderate house price growth means with over 36% of students choosing to approximately 299,000 people work in Areas in Newcastle have already Newcastle has relatively affordable remain in the city after graduation. The 0 the urban cores, and 45% of employees been identified in the Core Strategy, housing. Median house prices are 5.85 city also has a global pull; nearly 30% 2011-12 2010-11 2017-18 2012-13 2016-17 2015-16 2014-15 travel to work from outside the two which have potential to deliver over times median earnings, in line with of students at are 2013-14 2009-10 2007-08 2006-07 local authorities. 20,000 homes. Liverpool, Sheffield and Glasgow, and international students. 2008-09 Source MHCLG 2 3 Overview City Centre Development

New access to finance should stimulate the city’s tech sector Where next for city centre development? The growth A range of uses are required to support a vibrant city centre of the tech Grade A office space has significantly block, due for completion in the second buildings are targeting start-ups and diminished after a decade of limited half of 2019, which will help to make a SME occupiers, likely to be geared sector development within Newcastle’s core dent in the shortfall of Grade A supply. towards Newcastle’s emerging and the repurposing of a number of Newcastle also has strong technology and media sectors. Newcastle has seen a significant buildings to retail, leisure and student partnerships between the private However, The Lumen will cater for growth in the tech sector over housing. Grade A supply is currently at and public sector, supporting and a larger anchor tenant. the last five years, with digital 175,000 sq. ft. This total is 15% below accelerating the development and The Stephenson Quarter is a major tech start-ups increasing by 154% from 2011 to 2016. With the long- the 10-year average, but more notably, growth of the city. A £92m investment mixed use scheme including the 35,000 awaited JEREMIE2 funding now However, Newcastle faces several In addition to office space, the none of this is made up by new into the Newcastle and Gateshead’s 80 sq. ft. Rocket office building, which has live, new access to finance should challenges that need to be Core Strategy for Newcastle specifies development. Failure to meet demand hectares Accelerated Development Zone been fully occupied by Convergys since also stimulate the city’s tech addressed to keep up with other retail development as a particular has limited the growth prospects of is creating a clustering effect, which will its completion in 2016 – an indication sector. The £120 million fund could competing cities across the UK. priority for the urban core. It sets out local businesses and has made it harder stimulate productivity and job growth. of the demand for new office space in support 600 businesses and help In 2018, £27m in venture capital a desire to improve the range, quality to attract new occupiers. the market. The North East Futures create around 2,500 jobs over the funding was invested in companies and quantity of retail provision, with With this lack of supply in the A mixed use approach University Technical College (UTC) next five years. The then minister of state for headquartered in Newcastle, the specific ambition of increasing the city centre, growth has been inhibited However, funding for speculative and the six-storey Phoenix office digital, Matt Hancock, named outperforming Birmingham, Leeds amount of comparison retail by 50,000 over the last 10 years with occupiers commercial development has been development is of particular interest. the North East of the and Glasgow. sq. m. of floor space. Our analysis reliant on refurbishments to bridge very restricted. One way to deliver new The two buildings will be mutually fastest growing tech hub outside But Newcastle still has a business suggests that future developments the gap. Grey Street remains a popular commercial space is through mixed beneficial and interlinked. Phoenix will of London. Business growth and start-up rate per capita that is lower should seek to provide flexible retail location and refurbished space is use regeneration schemes where the accommodate dynamic, high-growth collaboration have been stimulated than all the comparator cities. and leisure formats that are currently letting up at speed, with several different uses limit the amount of companies and offer the potential for by a number of support networks This may in part be due to the lack under-represented in the city centre, as transactions in recent months including exposure to one single sector. cooperation with the adjacent UTC, including Digital Union and Dynamo, companies that specialise of appropriate commercial space to well as increased cultural, community Earl Grey House and 71 Grey Street. With this in mind, Newcastle is giving students work experience and in raising the profile of members attract new occupiers. The 2010- and civic uses, rather than solely Refurbishments have plugged the gap seeing a new wave of mixed use city mentoring opportunities. In return, and the sector as a whole. 2030 Core Strategy identifies the increasing traditional retail supply. over the last few years, resulting in centre regeneration schemes, which are new businesses to the area are able to The recent establishment dated nature of some of the city’s Given the importance of Newcastle impressive rental growth of around revitalising the urban core and enabling tap into a skilled talent pool. of the Newcastle Tech Trust, a office stock as a challenge. city centre as an economic hub for 10% on certain buildings. However, it to expand outward. Finally, East Pilgrim Street group of experienced founders The provision of more high- the wider North East region, creating new developments are the current These schemes are providing represents one of the most strategically that understands the needs of specification, serviced and flexible an urban core that acts as a focus for preference for larger occupiers as older complementary rather than competing important city centre regeneration early-stage, high-growth tech companies, is further empowering office space, concentrated in the investment and business, and meets buildings are less able to accommodate space. Helix – a £350m joint project areas in the north of England. The ambitious technology start-ups urban core, will be essential to the the needs of occupiers and residents modern methods of working. between Newcastle City Council, northern block of the site is allocated and scale-ups. Newcastle is home strength of Newcastle’s emerging will be critical for the long-term Innovative approaches to Newcastle University and L&G – for retail led development which to the only FTSE 100 software technology and media sectors. success of the region. ■ development have been key to unlocking creating a new innovation cluster in provides an opportunity to extend company in the UK – The Sage sites and the city council have made the city. the prime retail-led offer. This will be Group plc. good use of wraparound leases to In recent years there has been a supported by mixed uses in the central Key sectors attracting venture capital investment support office development. This trend towards smaller office and southern blocks, including office, includes the Helix’s 100,000 sq. ft. office requirements; therefore these initial residential and leisure.

40% 30% 11% Software Healthcare Energy

4 5 City Centre Development City Centre Development

Top rent: £24.50 per sq. ft. Bringing residential back to the city centre Growth of 6% by 2020 will also support commercial activity

Figure 2 The changing structure of the urban core Supporting growth Within , city centre will also support around 150,000 sq. ft. of city centre commercial activity. space has become marginalised and There are a number of sites actively largely redundant space for meeting delivering or planning to deliver the modern needs of retail, much residential units in the city centre, of which is located around Central including Strawberry Place, Forth Station. There is a great opportunity Yards and Pilgrim Street. However, in for regenerating the train station and comparison to regional peers there is the area surrounding it, which would significantly less Build to Rent (BTR) have a huge impact on attracting coming forward in Newcastle. occupiers to the city. The city’s first purpose-built Whilst the traditional CBD rental scheme, The Forge, is due to continues to be important, a new open in spring 2019 comprising breed of occupier is emerging, 280 flats and a full suite of placing less value on a traditional amenities. There are two other recognised address or location and schemes coming forward in the city more focus on quality of working centre, which together will deliver a environment, amenity and perhaps further 300 rental units. Retail most importantly, connectivity. The limited level of BTR delivery Heart Savills What Workers Want Survey in the city is in part due to the demonstrates that Millennials and relative affordability of housing. This Generation Z heavily value the limits the level of demand for rented social aspect of work and therefore accommodation, as many residents Historic it is critical that there is a variety are able to afford to buy their Office of amenities available in the nearby own homes. Core vicinity of a new development to However, provision of rented retain and attract new occupiers in accommodation remains key Central the city centre. to satisfying housing need, and Station Birmingham New Street station’s there is a growing pool of ‘lifestyle Regeneration redevelopment is a good example of renters’ who are attracted by flexible this and has provided the city with accommodation located close to a platform for growth. Over the employment centres and high- past 12 months key landmark office quality amenities. buildings in the vicinity of the newly A forward-thinking and targeted redeveloped Birmingham New Street approach to delivering a mix of Build to Rent Schemes Station have witnessed some of the uses in the city centre will have a  Construction highest rental growth in the city. positive impact on people wanting ● Planning With £1.5m of planned investment to live, work and play there and Key Locations in the station, Newcastle has the ultimately strengthens the demand ■ East Pilgrim Street ■ Helix potential to replicate this strategy. for the existing commercial space ■ Stephenson Quarter Bringing residential back to the located there. ■ ■ ■ Universities ■ Forth Yards ■ Three Sixty ■ East Quayside ■ Newcastle General Hospital ■ Strawberry Place -- Expanding City Centre Railway Stations

Source Savills Research 6 7 Beyond the City Centre Beyond the City Centre

Housing delivery in Newcastle exceeds target

Core Strategy MHCLG Local Delivery target Housing Need 2017-18 750 p.a. 1,073 2,300

Figure 3 Where next for housing outside of the city centre? Building momentum A joined-up strategy across the city will be needed to support the growing urban core

Housing delivery across Newcastle has and , while the city centre Where next? increased dramatically since hitting is lower value. The lower values in is highly its nadir in 2012-13 when only 65 the city centre potentially present a constrained by the green belt, with dwellings were completed. In 2015-16, challenge for bringing forward new over a third (35%) of its area currently net additional dwellings surpassed the urban regeneration schemes. protected. This has made it difficult 1,000 mark for the first time on record. for the council to find unconstrained This was followed up by over 2,700 and Green belt release land outside of the city’s urban core to 2,300 homes delivered in 2016-17 and Part of Newcastle’s success in deliver new housing to meet its need, as 2017-18 respectively – which are record increasing housing delivery has highlighted by the need to release land levels for the local authority. come from large-scale developments at and Callerton. This means that the city is now following green belt release, in The city will need to continue to identify delivering far in excess of both its particular Newcastle Great Park. The new sites if it is to sustain its current Core Strategy target, 750 per annum, development started in 2001 and is and forecast strong economic growth. and MHCLG’s standardised approach currently being bought forward by This raises the inevitable question to housing need, 1,073; welcome news Persimmon and Taylor Wimpey. of where next? following a decade of undershooting Over the past five years, the Plans are being brought forward its targets. This poses Newcastle a development has accounted for almost by Newby and Igloo for new mixed use somewhat unique challenge among a third (31%) of new-build sales in developments at the former Calders site major regional cities. Not how to Newcastle upon Tyne. Newcastle Great and East Quayside respectively, which increase delivery to meet demand, but Park will continue to be an important will regenerate parts of the waterfront. how to ensure that this level of delivery contributor to the city’s housing ‘But beyond this, Newcastle will likely continues, so that Newcastle can delivery, with a further phase of 1,200 have to look at further green belt releases maintain its position as one of the most homes receiving outline planning if it is to support future housing growth affordable UK core cities. permission in December 2018. within its boundaries.’ Newcastle Housing Status Core Strategy Allocations Average new-build values in However, Newcastle Great Park If this is not possible then the Developments over 200 units ● Outline Application ■ Callerton Newcastle were £196,000 in the 12 isn’t the only large-scale development city council will have to look beyond  200 to 400 ● Outline Permission ■ Newbiggin Hall months to September 2018, which is coming forward on land formerly in its own borders. Here it will need to 400 to 600  ● Full Application ■ & Kenton Bank Foot marginally higher than second-hand the green belt. In 2015, the council co-operate with its partners in the North 600 to 800 ● Full Permission  values which were £191,000 over the released land around Callerton for a of Tyne devolution to deliver ● Under Construction 800 to 1,000 same period. 3,000 home development, the first new housing in their authorities that  ■ Green Belt Values across Newcastle are highest phase of which is due to start on site are properly connected to the city’s Over 1,000 around the urban fringe and in Jesmond this year. employment centres. ■  Source Savills Research, Glenigan

8 9

Industrial Outlook & Forecasts

Landlords and developers would be advised to consider speculative development of good quality industrial space Rising demand from industry

The growth of the Industrial market notwithstanding current geo-political in the UK is well documented and sensitivities around Brexit, we expect Plenty of positives in the most part has been driven by major suppliers to the automotive 2.2% the continued growth of online retail, sector to continue to locate in the rents to rise in With above-average growth forecasts for homes and a new wave of city which in November 2018 set a new region, which will be amplified as R&D North East record with 21.4% of all retail sales progresses into alternative fuel vehicles. centre regeneration schemes, the signs are encouraging for Newcastle p.a. by 2023 being recorded online. Research from Lastly, we expect to keep a watchful Prologis states that for every additional eye on the progress of HS2, and in Residential €1bn spent online an extra 770,000 sq. particular when the contract awards With house prices in the North only investment demand from both it to expand outward. Each of these ft. of warehouse space is required. for the rolling stock construction are Until recently the North East may made. The North East already benefits recently returning to pre-credit institutional and private investors. schemes is offering something different have felt comparatively overlooked from the assembly of trains in Newton crunch levels, there is more capacity We forecast five-year compound house providing space which will complement when it came to benefitting from this Aycliffe and if further awards were to for both household finances and price growth of 17.6% in the North one another rather than compete. While surge in demand; however, 2018 saw be made this would again benefit local mortgage lenders to support growth East, outperforming the UK. top rents have remained static at around a sea change as Amazon committed suppliers and the supply chain that over the next five years than in £23 per sq. ft. over the last five years, to over 3m sq. ft. of warehouse space goes with it. other regions across the UK. Smaller Commercial we expect to see rental growth of 6% by in the wider North East, taking build-to- However, the supply of warehousing deposits for first-time buyers and After a decade of limited developments 2022 as new developments complete. suit facilities in Durham and Darlington. has fallen to just over 8m sq. ft. in 37% lower home-mover loan-to-income within Newcastle’s core, the cranes The implications of a forward- Combined with regular market churn the wider region, a fall of 37% since fall since this meant that for units over 10,000 2011, and much of this vacancy is of ratios compared with most of the rest are now firmly back on the horizon. thinking and targeted approach to 2011 of sq. ft. a new take-up record of 4.7m sq. grade B & C quality and arguably of the UK are expected to underpin Newcastle is seeing a new wave of mixed enhancing mixed use schemes will have warehousing ft. was set. not fit for purpose in today’s modern demand in the owner occupier market. use city centre regeneration schemes, a positive impact on people wanting to availability Not only will this change the manufacturing and retail supply chains. Meanwhile, we expect the ability to including the Helix, East Pilgrim Street live, work and play there and ultimately perception of the market to many but With rents in the North East achieve higher income yields in the and Stephenson Quarter, which is strengthens the demand for the existing we anticipate suppliers into Amazon to set to rise by 2.2% a year by 2023, northern cities to underpin revitalising the urban core and enabling commercial space located there. ■ require space as has happened in other in percentage terms more than many regions when packaging suppliers, for other established regions in the UK, example, take warehouse space close landlords and developers would Figure 4 Residential values annual change forecasts to their fulfilment centres. be advised to consider speculative The wider North East region is also development of good quality industrial 5-year benefitting from the agglomeration space or the refurbishment of 2019 2020 2021 2022 2023 compound effect of having major car second hand stock to bring it to growth manufacturing in the region, and modern standards. ■

14.8% UK mainstream 1.5% 4.0% 3.0% 2.5% 3.0%

3m sq. ft. North East 17.6% warehouse space 21.4% 2.0% 5.0% 3.5% 2.5% 3.5% for Amazon in Source Savills Research of retail sales North East online 1bn spent online requires 770,000 sq. ft. There is more capacity for both household finances and mortgage lenders of warehousing to support growth over the next five years than in other regions across the UK

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