Occupational Market

■  2015 was an exceptional year for the Birmingham office market in terms of demand, with the best take-up figures ever recorded.

■  The first quarter of 2016 has followed suit and has started exceptionally strongly and at 287,017 sq ft, is the best first quarter ever recorded. Key deals include the 90,000 sq ft pre-let to PWC, at Paradise Circus and a 40,000 sq ft letting to Pinsent Masons at 55 Colmore Row.

^{Source: Savills Research}

■  We expect 2016 to finish the year at 875,000 sq ft, 65% above the long term average.

■  Occupiers of offices will continue to question their overall office costs and we expect Birmingham to start to feel the ‘north-shoring effect' more strongly this year, as companies look to capitalise on the relatively low property costs and higher quality of life which Birmingham can offer in comparison to London.

■  While the West Midlands was worse hit by the last recession than many other regions, the scope for catch-up is strong. Relatively low employment and housing costs compared with that of London will support expansion. We estimate that moving a position from Central London to Birmingham could save £10,000 pa in property costs and £10,000 pa in staff costs.

■  Deutsche Bank's move to Birmingham has been discussed at length in the past, however, more recently, HSBC agreed a significant deal to forward purchase 210,000 sq ft at Birmingham's new development, 2 Arena Central, in a move that allows it to bring its UK personal and business banking operations to Birmingham.

■  With 1,000 head office roles moving from London to Birmingham before the end of 2018, this deal is particularly important, as it has shown that the Deutsche Bank deal wasn’t an anomaly, but has actually set the tone for things to come.

■  With HSBC and Deutsche Bank moving to the city, will we see other banks follow suit? With the city improving its office and retail offer, as well as the impending plans for HS2, we expect more banks and financial institutions to be drawn to the city over the next couple of years. Employment in the professional, banking and financial sectors in Birmingham is set to see growth of 8% over the next five years.

■  Birmingham’s growing creative sector, including the flourishing creative enterprises in Digbeth, has grown in importance over the last 12 months. We estimate that this sector accounted for 11% of all the leasing activity in Birmingham in 2015 (compared to 5% in 2014). 2015 also saw a 59% increase in take-up in this sector on the five-year average.

■  Oxford Economics predict that employment in the creative and technology sector, is forecast to grow by 8% over the next five years. This is a clear sign that the region (particularly Birmingham) will benefit from the TMT boom.

^{Source: Savills Research}

■  As well as established companies moving to the city, there is also growing demand from start-ups. Over 18,000 new businesses were registered in Birmingham in 2014, the second highest concentration in the UK.

■  This is reflected in the figures, as 70% of take-up in 2015 was for space under 5,000 sq ft. With the space around Moor Street station and the area around Digbeth ripe for regeneration, these could be the next hotspots for start-ups, especially in the emerging creative sectors.

■  Following a period of significant office development throughout 2006 – 2008, Birmingham has experienced a continued erosion of Grade A supply. This has accelerated dramatically during the course of 2015.

■  Tenant demand is recovering in Birmingham and there are increasing opportunities for developers going forward. Indeed, speculative development in Birmingham has started to pick up pace, with c.800,000 sq ft of space coming on stream over the next three years. Unlike the previous cycle, we anticipate this stock to come on stream, over a manageable, staggered time frame.

■  What really represents the renewed confidence in the market is Ballymore and M&G's forward funding of the Three Snowhill scheme, the final piece in the jigsaw of the 1m sq ft Snowhill development, which is being speculatively built and will provide over 400,000 sq ft of space when it completes in 2018.

■  However, in the short term, the city is actually likely to see a pinch on new builds towards the end of 2016 and into early 2017 when occupiers are going to have little choice but to turn to refurbished stock to meet their requirements.

■  With a short-term shortage of new space, 55 Colmore Row is ideally placed to assist with the supply of Grade A space towards the end of the year.

■  With competition for space outstripping supply, the gap between the rents on new build space and the best quality refurbished stock is likely to narrow as quality refurbishments come on stream. We have already seen this happen in regional cities such as Leeds, Manchester and Bristol and we expect Birmingham to follow suit.

■  3.3% growth per annum is expected over the next five years on new space. Rents have returned to 2007 levels this year (£32.50 per sq ft), with rents expected to hit £34 per sq ft by 2019.

■  This kind of prime rental growth will undoubtedly displace some businesses from the higher rented core areas like Church Street and Colmore Row, and we expect to see some decentralisation taking place in Birmingham, with some sectors looking to fringe locations when making property decisions.

Investment Market

■  In terms of investment volumes, Birmingham had the best year ever recorded in 2015, with c.£800 million transacted. This is 43% up on the previous year and 87% up on the long term average. A significant number of trophy asset sales contributed to this exceptional figure.

^{Source: Savills Research}

■  We expect 2016 to end the year above the long-term average but below the level achieved in 2015.

■  The 2016 investment market will be driven by smaller assets or larger trophy assets which offer scale and relative discount.

■  Looking at investor types, overseas buyers, attracted by the relative safety of investment in the regional office markets without the Central London price tag, made up 42% of Birmingham investment volumes in 2015, up 350% up on the previous year.

■  Birmingham's Colmore Plaza acquired by Ashby Capital for £140m, its first investment outside London, and 1 Colmore Square which sold for over £87m, well in excess of its initial asking price, demonstrates appetite in the market.

■  Given occupier demand for good quality space is set to continue for the foreseeable future, we’re also continuing to see investors looking for secondary assets in strong locations, where opportunities exist to fill the gap where limited new development is taking place.

■  In the past year, Birmingham office prime equivalent yields have moved in by 50 bps to 4.75% and we expect them to stay broadly at this level during the first half of 2016.

■  The key appeal, during 2016, will be from occupational performance. The key difference between now and 2008 is the occupational story, which is very strong.

■  We believe that we are now moving into the phase of the cycle where the majority of the total return will be driven by income return and rental growth, rather than just capital value growth.

Recent Birmingham investment deals

1 Colmore Square, Birmingham

Legal & General Property acquired 1 Colmore Square in Birmingham city centre for £87.3m, well in excess of its initial asking price. This achieved a net initial yield of 4%.

1 Colmore Square is a long leasehold multi-let office comprising 202,807 sq ft over 10 floors plus two levels of basement car parking providing 133 spaces.

Tenants include DTZ and EY.

65,919 sq ft of vacant space across three floors.

Three Snowhill, Birmingham

M&G Real Estate have committed to fund the development of the Three Snowhill office development in Birmingham with Irish developer Ballymore.

The £200m office building will offer 420,000 sq ft of space over 16 storeys.

Anticipated completion date is 2018.

Innovation Court, 121 Edmund St, Birmingham

Birmingham-based private property company Horton Estates has sold Innovation Court in Birmingham to DTZ Investors on behalf of the National Grid UK Pension Scheme for £20.5m.

The off-market deal sees a yield of circa 4.3%.

The mixed-use building comprises 45,000 sq ft of offices and is located on Edmund Street in Birmingham’s central business district. It is home to Savills and Mace, and has five retail units let to bar/restaurant Utopia, Urban Coffee, Clements & Church, Home and Benjamin Ryan Hair.