Savills World Research UK Cross Sector

Spotlight The Future of the M27 Corridor 2017

Retail and leisure scheme, Watermark, Southampton by Hammerson plc

SUMMARY Delivering homes and workplaces in and around and Southampton

■ The economy of the M27 corridor ■ The M27 corridor needs at least ■ With residential sales values and surrounds is growing faster than 4,000 additional homes per year, but outperforming commercial values, the national average, putting further the current delivery rate is leaving the new development is dominated by strain on an already undersupplied area short of need by 940 homes a housing schemes. There is, however, commercial market, and exacerbating year. Office conversions have provided potential to bring forward more the housing shortfall. 10% of all new homes in the last year. commercial space through residential- led mixed use schemes. ■ Demand for housing pushed up ■ There is very limited office supply house prices between 8.0% and available and no new developments 10.7% over the year to September under construction. Failure to meet across the M27 corridor, above the demand may inhibit growth prospects “The M27 corridor needs at least national average of 7.1%. However, of local businesses and make it harder they still remain more affordable than to attract new companies. Lack of 4,000 extra homes per year” neighbouring markets Winchester, commercial development has resulted Savills Research Chichester and East . in an increase in refurbishments.

savills.co.uk/research 01 Spotlight | The Future of the M27 Corridor

Market dynamics Public and private investment STRONG GROWTH, Through the City Deal, Portsmouth and Southampton are working together to support further growth, NEW CHALLENGES maximising the economic strengths of the M27 corridor and creating local jobs. The deal has provided £115m of local and national public investment to encourage over £800m of private sector investment, with a focus on supporting growth Strong economic growth in he economy of the M27 in marine, maritime and advanced the markets around the M27 is corridor and surrounds manufacturing sectors. is growing faster than This public investment comes at increasing the pressure for more the national average, a time of growing private investment. homes and workplaces driven by consumer Commercial investment is returning Tspending, an emerging tech sector, to levels seen during 2007, further expansion of maritime particularly in the office and industrial industries and inward investment. markets. Overseas investors However, strong economic growth increased their investment levels to in our study area, which includes the £157m during 2016, the strongest local authorities of Eastleigh, Fareham, level since 2007, which accounted for Havant, Gosport, Portsmouth and 43% of total commercial investment. Southampton, is putting strain on already undersupplied commercial Expanding tech sector markets and exacerbating the Technology is among the fastest housing shortfall. growth sectors in the M27 corridor, Economic growth in the six local growing by 33% over the past five authorities reached 14% over the years, outpacing the UK average of past five years, above the UK average 29%. According to Tech City UK’s of 11%. This was in part driven by latest report, Southampton witnessed “We expect the M27 corridor to the strong recovery in consumer digital turnover growth of 180% expenditure, boosting the wholesale between 2010 and 2014, faster than see further economic growth of and retail sector by 35% over the past any other UK city. 9.5% over the next five years, five years, exceeding the UK average The University of Southampton of 22% growth. We expect the M27 Science Park has helped to provide above the UK average of 9.2%” corridor to see further growth of 9.5% workspace, advice and support Savills Research in the next five years, above the UK for small digital science and tech average of 9.2%. businesses. Portsmouth and

FIGURE 1 Average house prices, affordability and supply in the M27 corridor

n House price ● Affordability (RHS)

£450,000 18

£400,000 16

£350,000 14 M27 corridor £300,000 12

£250,000 10

£200,000 8 940 current annual £150,000 6 shortfall of homes £100,000 4

Average house price (year to Oct 16) Average £50,000 2 in the M27 corridor* More affordable Less affordable affordable More Median house price to median earning ratio £0 0 * based on need from current SHMAs

Havant and net additional dwellings Gosport England Fareham Eastleigh

Chichester in the year to March 2016 Winchester Portsmouth Southampton East Hampshire

Source: HM Land Registry, DCLG, local authority SHMAs, DCLG

02 2017

Southampton Solent Universities and Chichester as cathedral cities FIGURE 3 specialise in engineering, sciences and the presence of the South Downs and creative industries, providing the National Park. Western M27 region with a strengthening skills base. Fareham and Eastleigh have average Office market This is additional to the strong house prices of c.£285,000, lifted marine and maritime sector which above the other M27 corridor areas has also grown during recent because they include some desirable years, driven in part by key assets villages such as Sarisbury Green, 265,000 sq ft such as the Port of Southampton, Locks Heath, Botley and Hamble. Portsmouth Naval Base and the Annual average Solent Marine Cluster. Office space needed take-up Southampton, Chandler’s Ford Growth of retail & leisure and Solent are the dominant office Established high end shopping markets in the Western M27 corridor. centres; Gunwharf Quays Average annual take up has reached (Portsmouth) and WestQuay 265,000 sq ft over the past 10 years, 430,000 sq ft (Southampton) are the main centres and should demand continue at this (1.6 years of supply) for the 1.4m shopping catchment. rate, a need for 1,325,000 sq ft of The region’s retail provision has office space will be required over the Supply of improved considerably in recent next five years. office space years, with the redevelopment of There is currently around 430,000 Whiteley shopping centre, near sq ft of office space available in the Fareham, creating around 1,000 jobs. Western M27 market, half as much With amenity offering coming high as in 2011 and the lowest level on up in Savills ‘What Workers Want’ record. This equates to less than two 0 sq ft survey, this scheme has also boosted years of supply and indicates the occupier interest on the nearby need for more new office space. Speculative new Solent Business Park. With no new build developments build development currently in the pipeline, and only Unmet housing demand 50,000 sq ft of office space currently Economic growth will place further under refurbishment, this reflects a pressure on an already undersupplied potential need for 845,000 sq ft of housing market. According to the office space over the next five years. current Strategic Housing Market Headline rents have stood between Assessments (SHMAs) for the local £18 and £21 per sq ft for the last 25 845,000 sq ft authorities along the M27 corridor, years. After a period of significant 5-year shortfall at least 4,000 additional homes are incentives from 2008 to 2014, rents required per year. have recovered towards the upper However, whilst the supply of new end of this band. Now incentives homes increased over the last five have reduced dramatically and longer Source: Savills Research years, reaching 3,060 in the year to leases are being agreed. n March 2016, it was still short of need by 940 homes. FIGURE 2 The low level of supply has contributed to an increase in house The Western M27 market has a shortfall of office supply, prices. Over the year to September with less than two years of space remaining 2016, house prices have grown 4.5 between 8.0% and 10.7% across all six local authorities, above the 4.0 national average of 7.1%. However, with the average 3.5 house prices in Portsmouth and Southampton at £205,000 and 3.0 £208,000 respectively, homes 2.5 2 years’ worth along the M27 corridor are relatively of supply affordable compared with neighbouring 2.0 Winchester, Chichester and East

Hampshire. These neighbouring supply of office Years 1.5 markets have seen even stronger 1.0 house price growth since the 2007/08 peak and average house prices are 0.5 close to or above £400,000. Values in these three markets have 0 been pushed up by better connections 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 to London, the status of Winchester Source: Savills Research

savills.co.uk/research 03 Spotlight | The Future of the M27 Corridor

Development comparatively easier to achieve on residential schemes. RESIDENTIAL Given these issues, one way to deliver new commercial space is through mixed use LEADING THE WAY regeneration schemes where the different uses support and cross subsidise each other. Residential new build New home values in most of the M27 corridor are between £300 and £350 Residential development is ousing demand, per sq ft with higher values achieved dominating property construction rising house prices on waterside schemes in Portsmouth and the potential and Southampton. Here, regeneration in the M27 corridor with limited new for residential and the waterside views has pushed commercial space being delivered development to values of up to £500 per sq ft. New achieveH higher sales values build values in the Winchester market than commercial uses, has been are higher, averaging between £400- prompting developers to deliver 430 per sq ft for larger developments. homes rather than workplaces. Higher paid workers in the M27 Our analysis shows sales values for corridor tend to live outside the residential development exceed sales major urban areas, preferring the values for both office and industrial neighbouring towns and villages. space across the M27 corridor (Fig.5). New build developments appealing We found the biggest difference to this more affluent market, such as in sales values in Chandlers Ford/ Berewood (west of Waterlooville), can Eastleigh area where average values achieve higher values and are more for new build homes reached £360 per accessible to work places. sq ft compared with £200 per sq ft for offices and £125 per sq ft for industrial. Office development With flat rents and rising build costs, Development lending there has been little incentive to add Funding is also a factor. Since the to new office stock in Southampton “New homes values in most of Global Financial Crisis, funding for city centre since the completion of the M27 corridor are between speculative commercial development Charlotte Place in 2008. has been very restricted and while Lack of new development has £300 and £350 per sq ft” there has been some availability of resulted in a surge of refurbishments, Savills Research loans for fully pre-let commercial including Mountbatten House and The development, finance has been White Building, achieving rents of up to £19.50 per sq ft. Limited choice has prompted companies including HSBC, KPMG and Babcock to move to out CONVERSIONS BRING of town business parks from central Southampton or Portsmouth to get the FORWARD STUDENT HOUSING space they need. Now that out of town rents have risen to levels in line with Southampton Commercial sites are under pressure city centre, we believe that the case for development is getting stronger. Office to student accommodation 2011. The Bond, a proposed 150,000 sq ft However, there is still a nervousness conversions have occurred in buildings office development, now has consent for among developers as to the viability of such as Brunswick House, Orion’s Point a student housing scheme. speculative office development. (former British Gas offices) and Marlands House. In addition, a number of proposed Another proposed office development office development sites have been lost or site, Aqua at WestQuay, now has consent are being lost to student schemes. for a hotel.

These include Mayflower Halls, which Other commercial sites are subject to previously had consent for offices but has redevelopment for other uses. The former now been built out for student housing, B&Q retail warehouse in Portswood is Residential sales values triggered by the University of Southampton currently being redeveloped to provide 525 exceed those for office issuing an OJEU for 1,000 student beds in student rooms on its completion in 2017. and industrial space

04 2017

FIGURE 4 House prices in the M27 corridor

Average house prices New Build Values (year to October 2016) n Chichester Up to £200,000  Homes: £375 psf n £200,000 - £400,000 n £400,000 - £600,000 Winchester Eastleigh / n £600,000 - £800,000 Chandler’s Ford n Above £800,000  Homes: £360 psf n National Parks  Office: £200 psf Shopping Centre  Industrial: £125 psf

Petersfield Hayling Island  Homes: £300 psf Chandler’s Ford

South Downs Portsmouth Eastleigh  Homes: £300 psf (up to £500 psf on the waterfront) Southampton  Office: £200 psf  Industrial: £125 psf Solent WestQuay Waterlooville  Homes: £350 psf Whiteley  Office: £200 psf Shopping Centre  Industrial: £125 psf Solent Havant Fareham Chichester Southampton New Forest  Homes: £350 psf (up to £500 psf on the waterfront) Portsmouth  Office: £225 psf Gosport Gunwharf Hayling Quays Island Waterlooville / Berewood  Homes: £260-£330 psf

Winchester  Homes: £400-£430 psf (£600 for prime areas)

Source: HM Land Registry, Savills NB: psf = per square foot

Industrial Developments FIGURE 5 In the industrial market, Residential development has the highest capital values development of new space is still limited with a shortage of new sites. n Residential n Office n Industrial Lidl has recently opened their £55 £400 million distribution centre on the north west of Southampton, which £350 will serve stores in Hampshire, Dorset and West Sussex, creating £300 around 400 new jobs. Two other key industrial £250 developments are in the pipeline. £200 Mountpark Southampton, (the former Ford Transit assembly site), £150 is about to commence speculative development of four warehouse units £100 ranging from 57,620 to 128,000 sq ft and Evander properties are about £50 Average new build capital values per square foot new build capital values per square Average to commence development at South Central, adjacent to the M27, on £0 Central Southampton Eastleigh/ Chandlers Ford Solent Portsmouth three units ranging from 39,000 to 117,000 sq ft. n Source: Savills

savills.co.uk/research 05 Spotlight | The Future of the M27 Corridor

Regeneration

new homes will be needed over the next five years. If supply of new homes OPPORTUNITIES does not increase, the area will be some 4,600 homes short. FOR DEVELOPMENT Portsmouth and Southampton Development in Portsmouth is very constrained by its coastal location and a tightly drawn boundary to the north. It must therefore rely on brownfield redevelopement. Development is needed for homes here are 13,800 homes Southampton, by contrast, has and workplaces along the M27 under construction or some potential for urban extension to with planning consent the north in addition to regeneration corridor. But key hotspots are in the M27 corridor. of brownfield sites. Both cities emerging with mixed use opportunities If the current building have need for additional housing. Trate continues, it will take four and However, the market risk can be too a half years for those new homes to great for developers to build flat led be delivered. schemes required to provide homes Given that the current Strategic for sale within the city centres. Housing Market Assessments (SHMAs) Alternative residential models, for the six LAs identify the need for such as Build to Rent are becoming 4,000 new homes per year (and this more common. The Build to Rent may be an undercount), at least 20,000 model has a lower risk profile than

FIGURE 6 Homes with permission or under construction

Bordon KEY n M27 Corridor Barton Farm n Urban areas n National Parks M27 corridor supply Neighbouring supply ● Very large sites M3 3,700 6,800 Winchester LA

East Hampshire LA Chestnut Avenue 5,400 Horton Heath Boorley Green

Southampton LA Eastleigh 1,000 LA 4,500 Welborne 1 M27 Chichester LA 3 (Garden Village) West of Waterlooville 13,800 4,200 Homes with permission Fareham LA or under construction Havant LA 600 2 20,000 1,900 Minimum homes at least needed 1,200 Portsmouth LA in the next five years Gosport LA

Source: : Glenigan, Savills Research

06 2017

building for sale, however it still faces Beyond the two cities homes). Another large site in the challenges such as Stamp Duty. Eastleigh has a particularly large area, Horton Heath (950 homes), There are a number of Build to pipeline of homes which includes has a resolution to grant planning Rent schemes in the pipeline in both two big sites to the south east of permission subject to S106. Southampton and Portsmouth. For Eastleigh close to the airport and Outside the M27 corridor, instance, the redevelopment of the Southampton Airport Parkway Winchester, Chichester and East former Fruit and Vegetable Market in station (60 mins to London Hampshire have a significant number Southampton will provide 279 homes Waterloo): Chestnut Avenue (1,100 of homes with permission, including to rent in addition to business space. homes) and Boorley Green (1,400 the 2,000 home site at Barton Farm to the north of Winchester and the 2,400 home site at Bordon. “There are 13,800 homes under The more restrictive planning policies that apply in the South construction or with planning consent Downs National Park accentuate the in the M27 corridor” Savills Research need to provide homes in other parts of our study area. n

hotspots for regeneration Mixed use schemes

While residential schemes are dominating development along the M27 corridor and surrounds, there is potential for more workplaces to come forward through mixed use developments. Public sector support, both locally or through national initiatives such as the £3bn Home Building Fund can help provide development finance and offset the costs of site preparation.

Below are three emerging development hotspots to watch:

1 2 3 WestQuay and Tipner-Horsea Island North Whiteley Royal Pier, Southampton The Tipner-Horsea site, close North Whiteley, a greenfield The £85m Watermark leisure to Portsmouth City Centre, the site north of the M27 between complex, which includes over 20 Portsmouth International Port Southampton and Fareham, has restaurants, is being developed and Portsmouth Naval Base has outline permission for 3,500 homes alongside WestQuay Shopping potential to become a key gateway which are expected to be built by Centre. 260 flats are currently being to Portsmouth. Taylor Wimpey, Bovis and Crest marketed in its second phase. from 2018. Its central location provides an It could bring forward 2,370 opportunity to deliver homes for rent new homes and 580,000 sq ft of As an urban extension to Whiteley, as well as for sale. employment space for the growing it will provide a very different marine and advanced manufacturing offering to the more urban sites in WestQuay is likely to act as a sectors creating over 3,700 jobs. Portsmouth and Southampton. catalyst for the £450m development However, contamination, flood risk Building a new neighbourhood that of neighbouring Royal Pier that will and lack of infrastructure present appeals to the higher paid workers, transform Southampton’s waterfront. development challenges. who would otherwise choose to live in the surrounding villages, Plans include 500,000 sq ft of £48m of investment from the City would increase values and create a offices, 730 apartments and Deal and further Portsmouth City resilient place in the long term. around 40 shops. The Royal Pier Council support, including the Development Company has been building of the new motorway Enhanced leisure and retail facilities set up to work with the three junction on the M275, will all act at the nearby redeveloped Whiteley landowners: Southampton City to help unlock this development Shopping Centre have improved Council, Associated British Ports and opportunity. Solent Business Park as a location the Crown Estate, with anticipated and will increase the demand for completion around 2032. more new homes.

savills.co.uk/research 07 Spotlight | The Future of the M27 Corridor

OUTLOOK and recommendations The potential for growth in Portsmouth, Southampton and the wider M27 corridor

■ More homes and workplaces are they have, at best, been flat over the the commercial port is expected to needed to support the growing economy last few years, while out of town rents increase exports from 2.7m containers of the area. Housing schemes are currently have seen increases in the last 24 months per year to 4.2m. dominating development in the wider or so. area with residential sales values higher ■ With tight planning restrictions, than commercial. However, there is ■ In and directly to the north of the particularly on B8 Warehouse/Distribution potential to bring forward more office M27 corridor there is potential to provide and a focus on residential developments, space and a wider range of uses through much needed housing and bridge the more industrial space must be delivered mixed use development. value gap between the lower value urban to avoid hampering demand in the M27 areas and higher value rural ones. Large corridor market. This has consequently ■ We forecast that house prices in sites including the Garden Village at pushed rents up to £8.50 per sq ft for the South East will rise by 17% over Welborne could be instrumental in this. prime industrial space. the next five years, outpacing London and the UK average. ■ There also remain plans for a major ■ The weaker sterling is set to generate expansion of Southampton Docks by interest from overseas investors. ■ Office rents are expected to continue using reclaimed land on the New Forest But uncertainty surrounding Brexit to grow in Southampton city centre where side of Southampton Water. By 2030, negotiations remains a risk to investment.

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