16 Jul 2018
Investors able to spot developing trends and create fit-for-purpose assets in London’s emerging locations could generate enhanced returns.
Identifying and capitalising on the next big thing in London’s ever-changing real estate sector requires local knowledge, conviction and no little luck. The rewards for investors from getting in quick can be significant; as early entrants to Shoreditch and Brixton - prime examples from the past twenty years of areas that completely transformed – can testify.
While there are no guarantees on which locations will blossom from ugly duckling to beautiful swan, a combination of certain factors make it possible to work out which have a better chance than most. By making every effort to understand the unique local circumstances of the markets in which we invest, we believe we are well placed to identify the preconditions of urban change, or even help generate it.
Educated young Londoners, like the same cohort in many of the world’s other major cities, are increasingly opting to live in the vicinity of similar people and close to centres of work, reducing the hassle of commuting.1
Across the world, rising demand among more affluent groups for residential properties has in turn lured property developers. As long-term access to a skilled workforce is a critical component of their decision-making, more and more businesses are setting up shop in the same kind of ‘emerging’ locations. Since they are often situated nearby much more expensive areas, land values in these areas have subsequently often increased dramatically.
A number of different pieces of data could help identify urban areas on the verge of change. Being close to existing high-value neighbourhoods is one key ingredient. Demographic information is another, and perhaps the best indicator of who will spend time in an area in the long term. Meanwhile, transport connectivity data measure how well connected different ‘micro’ locations are. Data on house prices and crime trends also indicate how an area is changing.
It is important, however, to be aware of areas where change is already well underway. For example, King’s Cross has recently attracted significant private sector investment, while Farringdon, located at the edge of the city’s financial district, will be affected by no fewer than three major rail projects by 2023. Given this, investors may struggle to find value in these locations as urban change may have already been priced in.
Investors should look for signs of public sector support, including in transport infrastructure, as this is often a catalyst for urban regeneration. If connectivity is not already excellent, improving local transport is fundamental in a city like London. The Bakerloo line extension for example, if and when it arrives, could unlock residential and retail opportunities in areas like New Cross and Lewisham.
Additionally, a planning environment supportive of development can be important. Hackney and Tower Hamlets councils recently jointly submitted a bid to host a Creative Enterprise Zone for instance.2 Such support is a good signal for future growth in places like Dalston, Hackney and Whitechapel.
Evidence of broad private sector activity is another good indication of an area’s trajectory. The arrival of independent retailers, coffee shops and craft brewers should be seen as a positive. In Waterloo, the steady transition of Lower Marsh is a promising example.
Investors must also take the micro-location’s property market characteristics into account. One of the main attractions of any emerging neighbourhood will be the discount in rents compared to the nearest higher-value counterpart. The size of this discount is crucial. So much the better if the urban landscape is attractive and distinctive, helping to instil a sense of cultural pride.
An investor does not necessarily need to be a first-mover, and evidence of other investment can be positive as it suggests a micro-location may offer the opportunity for other committed investors to build critical mass. Both Southwark and Borough have buildings of scale that have received interest from a number of investors. It is a delicate balance though, as too much evidence of private sector investment could indicate the opportunity may have been missed.
Investors can use their understanding of the property ownership and occupier base is to identify any gaps in the real estate provision of a given area. For instance, growth in employment without office development or refurbishment to match that demand may suggest a pent-up need for extra workspace. This requires investors to be proactive in developing crucial relationships with local stakeholders.
Investors should remember the extra risks associated with trying to unearth the next up-and-coming location. There are no guarantees it will develop as expected, or within the investor’s time horizon. In south east London for example, Deptford has been undergoing gradual change for many years, with new residential and mixed-use developments having mixed success. Both letting and selling properties may prove harder than expected.
But investors can mitigate the specific risk through careful analysis. If expectations of an area’s emergence are correctly considered, divestment should be fairly rewarded barring a collapse of the wider market. And investors always have the ability to boost returns through expert asset management and investing in scale.
The bottom line is that there is scope for delivering strong investment performance by investing in emerging neighbourhoods as part of a balanced portfolio. But in order to successfully identify the right areas, it is essential investors know their chosen locations inside out. It is impossible to identify a place where people will want to live, work, play and learn without truly understanding that market and its physical environment. Real estate is a local asset class, and this point comes to the fore when finding promising micro-locations.
Jonathan Bayfield - Senior Research Analyst, Global Real Estate
Main responsibilities
Jonathan manages Aviva Investors’ Real Estate Research Team thought leadership and insight program. He is also responsible for developing a house view on the attractiveness of specific UK and Irish property sectors and investment strategy for our UK and Ireland focussed real estate funds.
Experience and qualifications
Prior to joining Aviva Investors, Jonathan worked in JLL’s Retail Research and Consulting team, in the UK and Europe. Jonathan holds an MSc in Real Estate from Reading University's College of Estate Management and a BSc in Geography from University College London. He is a member of the SPR, Revo and the ICSC.
Dan Bright - Graduate Analyst, Real Estate
Main responsibilities
Dan currently works in Aviva Investors’ retail asset management team, focussing on locations in south east England. Previously, he was responsible for analysing transactions in the real estate portfolio analysis team, as well as contributing to the origination of new opportunities. He has also spent some time in the real estate strategy and research team, developing a house view on the attractiveness of specific UK property sectors and investment strategy for our UK-focussed real estate funds.
Experience and qualifications
Dan joined Aviva Investors following an internship in the Real Estate Long Income team in the summer of 2016. He holds a BA in Economics and Management from Oxford University and is a member of the Society of Property Researchers.
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