UK COMMERCIAL PROPERTY MONTHLY

Transcription

1 UK COMMERCIAL PROPERTY MONTHLY A round-up of the latest economic and commercial property market data Editors: Roger Bootle and Ed Stansfield Retail rental values finally show signs of life The economy grew by.%q/q in Q, with services activity, industrial production and construction output all faring well. But perhaps even more notably, there are signs that productivity has finally begun to improve. This should help to trigger a more meaningful and sustainable pick-up in wage growth. Meanwhile, inflation dropped to just.% in September and, with oil prices lower, it is likely to fall further yet. Interest rates will start to rise early next year, but only slowly. (See page.) Market intelligence shows that Central London office take-up is at healthy levels but also that the office market recovery is increasingly broad-based. In most other large towns and cities across the UK, office vacancy rates have started to fall, and speculative construction has made a comeback. (See page.) The IPD Monthly index showed that all-property rental values grew by.%m/m in September, the second-biggest monthly increase since mid-. Industrial and office sector rental values continued their recovery, but perhaps the most noteworthy aspect of September s data was the increases in rents for standard shops and shopping centres. (See page.) The broad-based rise in rental values and a renewed fall in yields in September meant that capital value growth picked up from.%m/m in August to.%m/m. Capital values are firmly on track to meet our forecast for a % rise in as a whole. But they are likely to slow thereafter. Indeed, the first signs of a floor for yields seem to have come in London s West End office market. (See page.) Investment market activity eased down again in September, but the value of deals of.bn was still the second-highest September outturn since. UK-based investing institutions and Far Eastern investors continue to be the dominant net buyers of commercial property, with other overseas investors (e.g. Irish) and property companies significant net sellers. (See page.) Nov. Kelvin Davidson + () North America Europe Asia Bloor Street West, Suite Buckingham Palace Road #- Income at Raffles Toronto, ON London Collyer Quay MW E SWW TR Singapore Canada United Kingdom Tel: + Tel: + Tel: + () Managing Director Chief Property Economist Property Economist Roger Bootle (roger.bootle@capitaleconomics.com) Ed Stansfield (ed.stansfield@capitaleconomics.com) Kelvin Davidson (kelvin.davidson@capitaleconomics.com) UK Commercial Property Monthly

2 Economic Drivers The recovery continues Despite the weak global environment and the higher exchange rate, GDP grew by a solid.%q/q in Q. (See Chart.) Growth was fairly broad-based too, with services making a strong positive contribution (albeit smaller than in Q), and both industrial production and construction output growth accelerating. Although early data for Q have raised concerns that the recovery may now lose pace, we think growth will remain at about %y/y in both and. Employment rose again in August, hitting a record high of.m. (See Chart.) However, barring a huge increase in the September data, employment may have only grown by perhaps.%q/q in Q, less than the rise in GDP. This implies that the long-awaited improvement in productivity may have begun. In turn, this suggests that a more meaningful and sustainable pick-up in wage growth may also be imminent. That said, wage growth may not reach prerecession rates of % to % anytime soon. However, it is unlikely to take much of a pick-up for consumers to see tangible increases in their real spending power. After all, inflation dropped from.% in August to.% in September, a five-year low. Moreover, not least because of lower oil prices, we think inflation has further to fall over the coming months. (See Chart.) In terms of the monetary policy implications, it is worth remembering that the MPC has raised interest rates many times before when the prevailing inflation rate has been below target. But the absence of any major underlying inflationary pressures should still ensure that interest rates rise at a very gradual pace over the next few years. (See Chart.) : UK Real GDP %q/q (RHS) %y/y (LHS) CE forecast : ILO Employment (Millions). : Consumer Price Inflation (%y/y) Headline CPI inflation Core CPI inflation : Interest Rates and Bond Yields (%) -year swap rate -year gilt yield Bank Rate % target CE forecast Sources Thomson Datastream, Capital Economics CE Forecasts UK Commercial Property Monthly

3 Market Intelligence The regional office market recovery is gathering speed Net inflows of money into pooled commercial property investment funds dropped from m in July to m in August, the third consecutive fall. (See Chart.) Even so, the latest figure was still decent compared to the inflows seen prior to the credit crunch and during the - rebound. Moreover, with anecdotal evidence suggesting that some funds are struggling to spend the money they have already taken in, these data suggest that investment market activity isn t likely to slump anytime soon. Turning to the occupier market, August s lull in Central London office take-up was not repeated in September. Indeed, take-up surged to about m square feet last month, not far short of December s figure, which itself was the highest since late. (See Chart.) The apparent strength of occupier demand suggests that rents will continue to rise for some time yet. But the office market upswing has now also spread beyond London and the South East. Indeed, as Chart shows, vacancy rates have begun to fall in many of the UK s largest office markets. Admittedly, the levels of office vacancy rates in Birmingham and Glasgow, for example, are still comparatively high. But that is not unusual and rents can often benefit simply from a change of direction for availability. Further evidence for a strengthening regional office recovery comes in the form of JLL s speculative development data. As Chart shows, speculative construction is set to reach a six-year high in. Thereafter, barring a major shift in sentiment that deferred planned starts, new office development activity in the regions could rise higher still in. : Net Inflows From Retail Investors to UK-Domiciled Property Unit Trusts/OEICs ( m Per Month) are monthly averages from annual data Q to Q are monthly averages from quarterly data October onwards are monthly data : Central London Office Take-Up (Square Feet, Millions). Series. Monthly total. -month moving avg : Office Vacancy Rates (%) : Speculative Office Development Activity Across Core * Regional Markets (Square Feet, Millions). Series. Planned start. Definite start. Under construction. Completed Q Q Q Leeds Edin. Manc. Card. Bristol Glas. Birm. Sources IMA, CBRE, JLL *Birmingham, Bristol, Cardiff, Edinburgh, Glasgow, Leeds, Manchester, Western Corridor UK Commercial Property Monthly

4 Property Market Indices Rental Values Retail rents finally show some life All-property rental value growth perked up after two quieter months in July and August, with September s rise coming in at.%m/m. (See Chart.) That was the second-biggest monthly increase since mid- and lifted the annual growth rate to.%. Rental values have now risen for months in a row and this upturn is also becoming increasingly broad-based. For example, although Chart shows that Central London continues to outperform, rental values are also rising steadily elsewhere. Indeed, in the South East, rents were up by.%m/m in September, pushing up the annual growth rate to.%, a -year high. For the Rest of UK segment, growth is a little patchier. But rents in this market have at least not fallen for eight months and the solid economic outlook should drive renewed gains. : All-Property Rental Values (%) Monthly change (RHS) Annual change (LHS) : Office Rental Values (%y/y) - - City and West End combined Non-Central London But perhaps the most noteworthy aspect of September s data was the performance of retail rents. Standard shop rents rose by.%m/m, the largest gain since May. This lifted the annual growth rate into positive territory for the first time since December. And shopping centre rents grew by.%m/m, the best figure since September. Retail warehouse rents are also improving. (See Chart.) : Retail And Leisure Rental Values (%m/m annualised) Shopping centres Retail warehouses Standard shops Leisure Meanwhile, the industrial occupier market upturn continues. All-industrial rental growth rose to.%y/y in September, a -year high. The South East continues to drive the upswing, but Rest of UK rental growth (.%y/y) is now close to surpassing the peak growth rate of.%y/y in the - upswing. (See Chart.) : Industrial Rental Values (%y/y) - - South East - Rest of UK Source IPD UK Commercial Property Monthly

5 Property Market Indices Yields and Capital Values West End offices may be first market to reach a floor for yields After a temporary lull in August, the pace of falls in all-property initial yields picked up again in September. The drop of bps, from.% to.%, was comparable to the average monthly decline in the first half of the year and took yields to their lowest level since May. (See Chart.) Although we wouldn t expect commercial property to follow every gyration in the financial markets, the recent falls in bond yields, at the margin, may just reinforce investors interest in the sector and sustain the downwards pressure on yields. With rental values gathering momentum and yields continuing to fall, capital value growth increased in September, from.%m/m in August to.%m/m. (See Chart.) The annual growth rate also improved, from.% to.%, a four-year high. Base effects mean that the annual growth rate for capital values should stay at % to % over the next few months, before beginning to ease lower from early. Certainly, the recent slowdown in real estate equity prices points to fading growth in physical capital values. (See Chart.) In addition, it is also worth noting that London West End office yields have now been unchanged at about.% for three months in a row, perhaps the first segment to reach its floor for yields. All-property total returns increased from.%y/y in August to.% in September. South East offices held onto the top spot, with a total return of %. (See Chart.) Retail property continues to underperform, but at least absolute returns in this sector have improved. : All-Property Initial Yields and -Year Gilt Yields (%) Property to bond yield spread IPD all-property initial yields -year gilt yields : All-Property Capital Values (%) - Annual change (LHS) : Total Returns (%, Year to September ) Sources IPD, Thomson Datastream Monthly change (RHS) : Real Estate Equities and All-Property Capital Values Real estate share prices, %y/y, adv. m (LHS) Capital value growth, %y/y (RHS) UK Commercial Property Monthly

6 Investment Market Far Eastern investors still targeting the UK Following a sharp drop in August, albeit from a very high level in July, the value of commercial property transactions eased down again in September, dipping to.bn. That was % lower than September s figure, causing the -month moving average to drop. (See Chart.) However, we wouldn t get too gloomy. September s figure was still the second-highest for that month since. For Q as a whole, the retail, industrial, hotel, and leisure sectors all saw higher deal activity than a year earlier. Because of a sluggish August, however, office sector investment market activity in Q was slightly lower than a year earlier. (See Chart.) This may reflect the low yields in the London office market, which might be causing investors to pause for thought. After a very active August, overseas investors had a quieter September, making net purchases of UK property of just m. Irish, US and Middle Eastern investors made net sales, but Far Eastern investors have continued their strong run of net buying. (See Chart.) In fact, the last time this group made net sales was April and over the subsequent months their total net purchases have been.bn. Private individuals were also net buyers in September, with the figure of m the first positive reading in months. UK-based investing institutions were also net buyers in September, to the tune of m, boosting Q s total to.bn. (See Chart.) Much of this stock seems to have been provided by property companies, who remain net sellers. : Value of Transactions ( bn) : Total Investment Flows by Sector ( bn) Series Retail Industrial Office : Net Investment by Overseas Buyers ( bn) Other Middle East Far East Germany Ireland Series Source Property Archive Trend-line (-mth moving average) : Net Investment by Buyer Type ( bn) - - Private individuals - Quoted property companies UK institutions UK Commercial Property Monthly

7 Economic Indicators and the Month Ahead ECONOMIC INDICATORS Q Q Q Q Q GDP, %y/y GDP, %q/q Financial and business services output, %y/y FBS employment, %y/y M&A deals involving UK co s, value and no. NA/.bn/.bn/ - - Distributive trades output, %y/y Household spending, %y/y CBI Industrial Trends optimism balance Manufacturing output, %y/y Net new lending to commercial property -.bn -.bn -.bn - - Total outstanding property debt.bn.bn.bn - - Lending to property as a % of all lending yr swap rate, %, average over the quarter..... to date Jun. Jul. Aug. Sep. Oct. Industrial production, %y/y Employment, %y/y Claimant count unemployment, % Nationwide house prices, %y/y Retail sales volumes, %y/y CPI inflation, %y/y Bank of England repo rate, % yr swap rate, %, average over the month..... to date Sources Thomson Datastream, National Statistics, Bank of England THE MONTH AHEAD Latest Number Period Covered Next Release Date Period Covered Nationwide house prices, %y/y. September th st October October CIPS manufacturing sector PMI - September rd November October CIPS construction sector PMI - September th November October CIPS services sector PMI - September th November October Industrial production, %y/y. August th November September Bank of England repo rate, %. October th November November Employment, %y/y. August th November September Claimant count unemployment, %. September th November October CPI inflation, %y/y. September th November October MPC minutes (tighten/no change/loosen) // October th November November Retail sales volumes, %y/y. September th November October RICS Commercial Property survey - Q th October Q Bank lending to property - August th October September IPD Quarterly index - Q st October Q IPD/BPF/S&P Lease report - th November IPD Monthly index - September th November October IPF Consensus forecasts - Q th November Q Colliers/Real Estate Capital survey - Vol. Late Nov. (indicative) Vol. De Montfort Lending survey - Full-year Late Nov. (indicative) H Sources Thomson Datastream, National Statistics, Bank of England UK Commercial Property Monthly