Long-term returns from commercial property depend on how strong the economy will be in the area where you invest. A robust local economy will see solid demand and rising income, while a stagnant economy will mean difficulty attracting tenants and raising rents.
While there are plenty of ways to assess how healthy a property market is, an important one is employment growth, according to insurer Legal & General, which manages around £18bn in property funds. Its research identifies five key themes that can help spot areas that are likely to see above-average jobs growth and may be future commercial-property hot spots.
Five factors to watch
First, there’s education. Businesses tend to flock towards areas with a relatively high population of skilled workers, while skilled workers tend to relocate to where the best jobs are found. This circular effect embeds local differences, giving some towns and cities a distinct advantage when it comes to attracting the workers at the very top of their fields.
Legal & General’s research also found that there is a strong correlation between the proportion of residents educated to degree level and subsequent employment growth. The same is true of areas that are highly populated with students.
This implies that university towns tend to be a good bet for rising rental incomes and strong occupier demand. However, it’s also important to ensure that the town or city is populated by the right kind of employers. The proportion of workers employed in high-value-added professions, such as banking, finance and insurance, real estate, or professional, scientific and technical occupations, is a signal of imminent jobs growth.
Third, areas with expanding populations tend to provide an improving labour pool. Areas experiencing the highest rate of population growth over a ten-year period tend to have the highest rate of employment growth over the same term. Meanwhile, those areas witnessing a brain drain of highly skilled workers tend to experience the opposite dynamic.
Then there’s the benefit of clustering. When similar businesses cluster together, it has a positive impact on the local area. It increases productivity as a result of competitive pressure, and it drives innovation and stimulates the creation of new businesses. The more firms there are in an area relative to current employees, the more employment is likely to grow.
Lastly, consider transport links. Connectivity enables specialisation and trade – the bedrock of economic growth. The better an area is connected, the more pronounced subsequent jobs growth is likely to be. Legal & General found that the proportion of employees in an area who get the train, tube or tram to work is linked to strong future economic development.
The new hot spots
So what are Legal & General’s conclusions? Unsurprisingly, London is predicted to see huge jobs growth over the next ten years. However, the capital’s booming areas have changed significantly over the past decade.
Rapid population growth in the east of the city – in boroughs such as Tower Hamlets, Newham and Hackney – means that these areas now sit alongside Westminster, Southwark and the City of London on the list of those expected to see strong jobs growth. University cities Cambridge and Oxford, as well as regional markets around London’s commuter belt – Milton Keynes, Slough and Watford – also fare especially well.
Cities such as Bristol and Edinburgh, both of which are home to a high proportion of students, high value-added employees, highly skilled workers and a strong transport infrastructure are strong second-tier prospects. Some areas of Manchester and Birmingham are also fairly well placed.