Leeds City Region is undergoing a dramatic transformation, driven by economic growth, a strengthening financial services sector, a large student population and increased inward investment.

Within Leeds city centre, the region’s economic hub, the opening of the First Direct Arena, with capacity for 13,000, and Trinity Leeds in 2013 have marked some of the most striking changes so far.

There is more to come. The recently opened £165m addition of Victoria Gate Shopping Centre, anchored by the largest John Lewis outside London, is expected to increase Leeds’ shopper footfall to 1.5m and add to the city’s draw.

Beyond the city, the region has seen strong inward investment since the financial crisis, recording £975m during 2015, its strongest year since 2006.

Market sentiment has improved since the lull following the referendum. The purchase of 3 Sovereign Square by Leeds City Council for £43m marks a key deal since the referendum, reflecting a net initial yield of 5.42%.

With a further £75m of office investments to transact before year end, we expect the majority of demand to come from overseas investors looking to the regions for value.

Further ahead, the delivery of the second leg of HS2 into Leeds will deliver further economic stimulus, creating a potential 20,000 jobs and providing a catalyst for development around the station. The opening of the line, which is expected in 2033, will increase capacity and improve connectivity, adding to the attraction of Leeds.

Strong economic picture

The region’s economy has grown by 6% over the past five years and is expected to accelerate by 8.8% over the next five, according to Oxford Economics. Together, Barnsley, Bradford, Calderdale, Craven, Harrogate, Kirklees, Leeds, Selby, Wakefield and York contribute £62bn to the UK economy.

Leeds city delivers one third of the region’s economic output as the second largest financial services centre after London. Office based employment within Leeds City Region grew by 5.6% over the last five years. Despite Brexit, the region is still forecast to see positive employment growth over the next five years at 3.4%. The tech sector is expected to grow by 5.6% over the next five years.

^{Source: Oxford Economics}

Educated workforce

With a large student population, the region has a ready talent pool. There are eight universities in the region, with 116,000 students, according to the Higher Education Statistics Agency (HESA). 74% of the region’s graduates work in Yorkshire, while only 7% move to London.

Staffing and property costs are also competitive, with some of the lowest rents within regional cities. We expect this to stimulate continuing demand for office space from both indigenous, ‘north-shoring’, and inward-investing businesses.

With office rents in London now at record high levels, we believe ‘north-shoring’ will remain a theme over the medium term, as businesses seek to control costs.

Challenges ahead

Jobs growth means more demand for employment space and in turn puts further pressure on housing. The continued strong take-up within the Leeds office market has been a catalyst for development over the last 12 months. With 47% of space being delivered in 2016 already pre-let, this should pave the way for future development within the city.

However, despite a recent number of completions, Leeds city centre has only two years of new Grade A supply, with 109,000 sq ft due to complete by the end of 2017. With average annual Grade A take-up of c.250,000 sq ft, there is still a need for further development.

Housing shortfall

Leeds will have the 7th fastest growing resident population up to 2020, with Birmingham and Manchester ranking 34th and 38th respectively. In the wider region, the population has grown by 3.1% over the past five years. Oxford Economics indicates a further 2.4% growth over the next five years, equating to a rise of 73,000 people.

The City Region needs 14,900 new homes per annum but in 2014/15, only 7,310 new homes were delivered, resulting in an annual shortfall of 7,500. Compounding this historic shortfall, four of the ten local authorities in the region do not have a five-year land supply for delivery of new housing. There is a need for new sites for residential development to be brought forward, particularly in Leeds and Bradford.

Rising costs

The Leeds office market is still good value compared to Manchester (£34 per sq ft) and Birmingham (£32.50 per sq ft), with a top Grade A rent of £28 per sq ft per annum. However, due to tight supply, we expect top rents to grow by 2.3% a year, hitting £30 per sq ft by the end of 2019.

Reduced new supply has also had an impact on house prices. Across the region, values are now close to or level with their 2008 peak. Some key hotspots have outperformed this. Leeds is 3% above the peak, with average transaction values at £165,600, and York is 14% above peak, with average values at £231,700. We expect prices in Yorkshire and Humber to rise 10% over the next five years.

^{Source: Savills Research, Glenigan, DCLG}