Bristol is undergoing dramatic change, supported by the fastest growing economy outside London, city centre regeneration and a vibrant cultural scene that saw it voted as the best city to live in by The Sunday Times last year.

The economy rebounded strongly following the recession, expanding by 19.2%, between 2009 and 2014, ahead of Birmingham (16.3%) and Manchester (15.2%), with the best performances coming from manufacturing, real estate and construction, the latest Government data shows.

This economic growth is reflected in strong demand for both residential and commercial property across the city and beyond its boundaries. House prices rose by 11% in 2015, well above the 6.4% average for England and Wales and just behind London’s growth of 12.4%, according to HM Land Registry.

One of the biggest employers in Bristol is the public sector, with the largest single employer being Bristol City Council with over 5,000 employees. The universities and hospitals also provide a significant number of jobs. We expect this sector to continue to grow with more office requirements from GPU and Central Government going forward.

However, the fastest growing sector, in terms of employment, is the professional, scientific and tech sector, which has grown by 44% over the last five years, closely followed by the information and communication sector, which grew by 26% over the same period, demonstrating the strength of the TMT sector in Bristol.

Indeed, our take-up figures show that the TMT sector has grown by 70% from the 2008-2010 period to the 2013-2015 period (fig 1). Further to this, the BBC is a major occupier in Bristol city centre, employing around 2,500 people. We have also started to see a number of tech clusters forming around the city in places such as Clifton and Spike Island.

However, this economic success brings further development and planning challenges which must be tackled to ensure the city’s competitiveness and continued growth.

The population is projected to increase by 9.3% between 2015 and 2025, adding 41,000 more people to a city of 450,000. Employment growth means that an estimated 14,000 office based jobs will be created during the next decade.

To accommodate these workers, we estimate between 900,000 sq ft and 1.4 million sq ft of floor space will be needed over the next ten years. As one of the key cities within the UK, Bristol needs to develop the suitable commercial space it requires to continue to attract inward investment and enough housing to accommodate its growing population.

^{Source: Savills Research}

^{Source: Oxford Economics, DCLG, HM Land Registry, Bristol Core Strategy 2011, North Somerset Core Strategy 2012, South Gloucestershire Core Strategy 2013, Savills Research}

Office demand & supply

Lower property and staff costs compared with the South East, have also acted as a magnet for businesses making a move to the South West. As the UK’s fifth biggest city and regional commercial hub, demand for office space both within the city and its surrounds has been consistently strong over the last five years.

Last year, take up of office space in the city centre was just under the five year average of 533,000 sq ft. However, take-up in 2016 is expected to reach 800,000 sq ft, 63% up on the previous year. Is there enough available space to soak up this demand?

Our analysis shows there is currently a severe under-supply of new space in the market, with only one year’s worth of Grade A supply available. We anticipate a continued decline in supply levels going forward, with increased demand and limited developments (fig 2).

The next scheme to complete will be Aurora, Finzels Reach in 2017. This scheme will provide 95,000 sq ft of new office space, the equivalent of less than a year’s worth of supply, which is not enough to satisfy future demand. The lack of new developments could inhibit future inward investment into the city as well as preventing current occupiers from upgrading their space.

There is potential for additional developments, such as Aspire (200,000 sq ft), 3 Glass Wharf (109,000 sq ft) and Glass Fields (100,000 sq ft) to start on site, which are yet to be confirmed. A significant pre-let would likely kick-start more much needed development within the city centre over the next few years.

We have seen the lack of office space available in Bristol drive the demand for ‘value-add’ office refurbishment opportunities. These are attractive given their speed to market and their ability to ‘plug the gap’ while the market waits for developments to complete. These include: 1 Cathedral Square, catering for the more corporate tenant, and Pithay, geared towards the more creative start-up.

^{Source: Savills Research}

^{▲ Aurora is a 95,000 sq ft office project in Bristol city centre}

Office rent increases

Due to the lack of new supply coming through in the Bristol market, Savills forecasts prime rents to break through the £30 per sq ft barrier during 2016 and rise to £35 per sq ft by the end of 2020. Indeed, Bristol is likely to see the best rental growth of all the UK cities and could see a 12% rental increase on the best space by 2017.

This supply/demand imbalance has driven rents upwards in the Grade B market (£25 per sq ft), whilst good quality refurbishments are achieving similar rents to Grade A space. The rental differential is likely to widen again as new developments set higher rental levels.

Investment

£385m was invested in the Bristol office market during 2015, the highest level of investment since 2006, well above the 10 year average of £210m. Overseas investment, made up 21% of volumes in 2015 and this trait has continued into 2016 with the recent sale of Bridgewater House at Finzels Reach for £56.3m. The sale was again to overseas investors and reflects a net initial yield of 5.35%. We continue to see investors looking for secondary assets in strong locations where limited new development has taken place. Opportunities now exist for active ‘value add’ opportunities within the city.

Rental and student

The private rented sector (PRS) is well established in the Bristol city centre, with 55% of households renting according to the 2011 Census. Rental values in Bristol city centre have been rising steadily over the past five years, growing by an average annualised rate of 6%, due to strong demand from young professionals faced with affordability constraints, a growing student population and very low levels of new housing supply.

The search for higher yields and fresh opportunities is prompting PRS investors to look beyond London. Previous analysis in Spotlight on Rental Britain earlier this year identified Bristol as one of the top cities for institutional PRS investment.

With 39,000 students at the University of Bristol and the University of the West of England, there is also strong demand for student housing. One third of these students can be accommodated in University controlled and private student housing. A further 1,500 student beds (11% increase) are in the development pipeline. In our Spotlight on UK Student Housing last year Bristol was identified as a “first league city”, reflecting both strong demand and a need for more supply.

Retail & Leisure

Bristol is ranked in the top 10 of the UK centres (PROMIS) and offers a broad mix of retail and leisure, supported by the thriving office and residential markets which in turn has fuelled this evolution.

The main shopping area of Broadmead focuses on Cabot Circus (1m sq ft of retail). Anchored by House of Fraser and Harvey Nichols, the scheme offers mid to high end retail, family leisure and casual dining. Broadmead is balanced by The Galleries Shopping Centre, which serves the value, convenience and mid-market sectors.

Clifton Village offers more upmarket boutiques and recently attracted The Ivy restaurant. To the north of the city, the Mall at Cribbs Causeway and The Venue are looking towards a significant expansion through development.

Residential property

Strong economic growth, increased competition in the mortgage market and robust demand from cash-only buyers, coupled with a lack of appropriate homes for sale, have driven up house prices in Bristol. As a result, Bristol saw the biggest increase in the value of housing stock outside London. The total value of housing in the city is now £44bn following an increase of £4.5bn over 2015.

Demand is mostly home grown. Our own data shows that over the last three years, the vast majority of buyers have come from Bristol and Somerset and have purchased a home as their main residence, with the bulk (52%) buying properties worth between £500,000 and £1m.

Average values in Clifton village, the most affluent neighbourhood in Bristol, exceeded £750,000 last year. Values in Leigh Woods were not far behind.

The majority of our purchasers were upsizing (59%) but a significant proportion (14%) bought because they were relocating, particularly at the higher end of the market. Among sales over £1m, which make up just over a quarter of our deals, 8% of these were bought by London buyers. However, not all of these buyers relocating their residence to Bristol were employed in the city. Among those buying homes worth £1m, 15% continued to work in London.

New build residential

We continue to see an undersupply in the new homes. With almost 4,000 new households a year projected to emerge in wider Bristol over the next 20 years, the area needs least 84,364 new homes, according to official estimates. (Wider Bristol HMA strategic housing market assessment, which includes the whole of Bristol, North Somerset and South Gloucestershire.)

Given that we saw an annual average of 2,984 additional new homes delivered across Bristol, North Somerset and South Gloucestershire over the five years to March 2015, this represents a potential future shortfall of at least 1,234 new homes if current building levels continue.

However, some have questioned whether the official numbers are high enough with alternative estimates of housing need north of 100,000 which would result in far higher housing shortfalls.

Our own experience suggests that market demand would support a higher number of new build sales.So far this year our agents have taken reservations for over 190 homes, which is more than Savills sold in the doldrum year of 2009.

More recently, we have seen high demand for smaller units with one and two bedroom apartments making up 92% of our sales in 2014-15. This year, affordability pressures on home purchasers and the search for better yields among investors has lead to an increase in demand for studios.

^{Source: Savills Research}

Government policy

Whilst 52% of our purchasers were homebuyers, 41% bought for investment and 7% purchased second homes (fig 4). This dynamic may change as a result of government policy to level the playing field between buy-to-let investors and first-time buyers.

The recent introduction of an extra 3% levy on top of standard stamp duty rates for investors and second home buyers, the phasing out of mortgage interest tax relief for landlords and the fact that residential property was exempted from plans to cut Capital Gains Tax, is likely to have a calming effect on investor demand.

Developers may therefore become increasingly reliant on homebuyers’ demand underpinned by other government initiatives such as Help to Buy and Starter Homes. Under current proposals, developers building schemes of 10 homes or more will be required to deliver 20% of the scheme as a “Starter Home”.

^{Source: Savills Research}

^{Source: HM Land Registry}