Why commercial property investors are heading for Cambridge

A highly educated population that’s attracting large companies, a restricted supply of office property and rapidly rising rents are combining to make Cambridge a hotspot for commercial property investors.

The city continues to power ahead, with predictions that its growth will outstrip all other major destinations outside London. It’s growth that’s driving the market in commercial property, making the city among the most desirable for UK funds and institutions investing in regional office.

What makes Cambridge different from other cities?

The main factor in the city’s success is the university. It’s a science and research based institution in contrast to Oxford which is more focused on arts and humanities. The result: an incredibly educated and employable workforce – over 40% have a higher education qualification. In fact, the city is ranked as having the UK’s most skilled workforce for tomorrow’s growth industries.

Consequently, big research and science players are drawn to Cambridge. Microsoft, AstraZeneca, Apple and Siemens have set up R&D centres in the city and AstraZeneca will create 2000 jobs when they move to their new £330 million headquarters there.

However, it isn’t just tech industries who want to be in Cambridge: lawyers and accountants also want a presence there too, piggy-backing off the back of the business being created by the research and tech firms.

Another factor making the location so attractive to companies is the ease of reverse commuting from London. Cambridge is just 47 minutes from Kings Cross by train which is also fast becoming a new ‘tech city’ itself. This could create a further boost in the future, with companies such as Google or Facebook having their HQ’s in Kings Cross and perhaps a research facility in Cambridge.

Added to that, a great deal of government money is going into the city, with £100 million investment before the end of 2020 so that the city’s transport and infrastructure keeps pace with its employment opportunities.

Plus, the forward-thinking local council has allowed development on green belt land, including a vast number of houses, so the city is expected to expand by almost a third over the next decade.

What are the prime office locations?

Cambridge is split between the ‘in-town’ market and the ‘out-of-town’ market.

Because Cambridge is a historic city, there’s only a defined area that can be built on – and high rises are out. The main hub of prime Cambridge offices is the station area, where Microsoft, Mott Macdonald, Slater and Gordon and Birketts have offices, a development know as CB1.

Most of the buildings are new build or tenants have pre-lets on upcoming developments. Allsop has recently purchased Kett House, an older building in this location. Landlords are happy to buy older buildings on the basis that at some point they can be redeveloped and massing on site significantly increased.

Out of town development

Occupiers doing research-based work need space for laboratories and testing sites, and out of town business and science parks provide this.

The Cambridge Science Park will very soon be served by its own brand new station, providing direct connections to London, King’s Lynn and Norwich from early 2017.

Rental growth and record yields

Occupationally, the city centre market is very, very strong because supply is constricted. This has seen prime rents rise from £30 per square foot to £35 per square foot over the last few years. Around 800,000 square feet of development has been let, almost all of it off-plan, truly demonstrating the strength of the occupier market.

In terms of prime Cambridge office yields, transactions at the end of last year demonstrated prime yields at around 4.75%. Investors are willing to accept these quite sharp net initial yields because of the expected rental growth going forward and underlying site values.

The rate of out-of-town business parks and science parks rental growth is in line with city centre growth – a knock-on effect of the constricted city centre market – but starting from a lower base of between £25 and £30 per square foot.

So what are the pitfalls?

It is difficult to see what would stop Cambridge being a powerhouse – companies want to go there because of the educated work force  and with the university, research facilities and Addenbrookes Hospital that will continue. Even a tech crash wouldn’t have a huge impact on Cambridge, because much of the research is medically led.

The main pitfall however, is the difficulty investors may face in simply entering the market.

Very few transactions happen in Cambridge. Pension funds tend to hang on to their holdings. The Cambridge colleges own a lot of land and buildings and generally never sell. Indeed, our purchase, Kett House, was one of the first offices in this cycle to transact.

When a Cambridge office does come to the market, it is very highly sought after, which obviously has an impact on pricing. There are also overseas investors and high net worth individuals seeking to invest in Cambridge as they recognise it as a major regional business location.

Most of the opportunities are now out of town offices. And if the assets aren’t transacting, the only way to get a foothold in the market is to buy land and develop yourself – something which is itself frought with barriers to entry. But while infrastructure changes are happening with new railway and bus services, transport needs to be improved at a more rapid rate than it is now in order to keep the expansion going in the long run.

None-the-less, Cambridge offers employment opportunities in sectors that will be increasingly important to the UK economy.

Dale Johnstone
Associate, Commercial Investment

Dale is a Chartered Investment Surveyor and Associate within Allsop’s National Commercial Investment team.  He advises clients including pension funds, property companies and developers in relation to sales, acquisitions and value-add opportunities across all sectors.

Contact

You can contact Dale for commercial property investment advice at dale.johnstone@allsop.co.uk or call him  on +44 (0)20 7543 6796

The posts on this blog are provided ‘as is’ with no warranties and confer no rights. The opinions expressed are the author’s own and do not necessarily represent those of their employer