QUARTERLY MARKETBEAT UNITED KINGDOM MARCH A Cushman & Wakefield Research Publication

Transcription

1 QUARTERLY MARKETBEAT UNITED KINGDOM MARCH 2014

2 MARCH 2014 CONTENTS UK PROPERTY INVESTMENT 3 Prime and secondary yields are under downward pressure as the UK property market builds momentum ECONOMIC OVERVIEW 5 The UK economy is forecast to be one of the top performing economies in Europe in 2014, despite concerns that the recovery is still unbalanced. PROPERTY FINANCE 6 The demand from bank and non-bank financial institutions for regional opportunities is growing. INDUSTRIAL 7 The strong competition for design and build opportunities is driving up land prices in key locations. REGIONAL OFFICES 8 Occupational and investment activity is picking up strongly in key regional offices markets. LONDON OFFICES 9 The London office market is buoyant, although supply constraints are impacting in core locations. RETAIL 10 Investor interest remains high for prime shopping centres, while demand is also increasing for smaller schemes in some secondary locations. RESIDENTIAL 12 Housebuilders have increased activity but it is still significantly less than required in many supply starved markets HOSPITALITY 13 The UK hotel market is building momentum, with sustained growth now being seen across most regional markets. RESEARCH SERVICES 15 FORECAST MARKET RETURNS (ALL SECTORS) Rental Growth pa Total Returns pa CAPITAL MARKETS GROUP CONTACTS Patrick Knapman Chairman, UK Capital Markets patrick.knapman@eur.cushwake.com David Erwin CEO UK Capital Markets Group david.erwin@eur.cushwake.com Charlie Barke Head of UK Retail Investment charlie.barke@eur.cushwake.com Mike Tremayne Central London West End mike.tremayne@eur.cushwake.com James Crawford Central London City james.crawford@eur.cushwake.com Chris Lewis Regional Offices chris.lewis@eur.cushwake.com Richard Peace Industrial richard.peace@eur.cushwake.com Adam McMillan Banking Resolution adam.mcmillan@eur.cushwake.com Michael Lindsay Corporate Finance michael.lindsay@eur.cushwake.com 2

3 MARKETBEAT UK PROPERTY INVESTMENT Following a stellar finish to 2013, there is now considerable momentum in the UK property investment market. The steady improvement being seen in regional occupational markets and a stronger outlook for the economy have boosted investor sentiment and this is underpinning increased demand from local and overseas investors for prime and secondary opportunities. According to Property Data, total investment volumes were 53.8 billion in 2013, which was the strongest performance for six years. Transaction activity was notably stronger in the second half of the year and a total of 17.9 billion was recorded in Q4. The office sector remains the top target for investors and accounted for 54% of all transactions in 2013, while retail accounted for 19%. Despite the industrial sector seeing very high demand from a broad range of investors, the acute shortage of stock is having a significant impact on activity and the sector only accounted for 9% of transactions during the year. While the Central London office market has accounted for a significant proportion of investment activity, the stiff competition in this market has meant that many investors have struggled to deploy capital and has forced many to look further afield for opportunities. This is benefitting key regional office hubs such as Thames Valley and Manchester, while second tier and select secondary markets are also witnessing an increase in demand and activity. Increased demand from European and, in particular, Asian institutional investors has been key to supporting stronger investment activity in recent months. Nevertheless, the market is also being supported by the increased availability of property finance and new lenders are entering the market regularly. The number of lenders targeting the regions has increased markedly to include debt funds, insurers and private equity, while there has also been a rise in equity and mezzanine capital that is prepared to invest in the regions. There has also been a notable improvement in sentiment from the clearing banks, which is helping boost investment activity in the regions and this is supporting the broader recovery in the UK property market. The weight of local and cross border capital targeting UK property, coupled with the lack of prime investment stock is driving down prime yields across all sectors. The C&W All Property headline average prime yield hardened by 37bps in 2013 to end the year at 5.51%. This was the lowest level since December Amid rising demand from investors, yields in some secondary markets are also under downward pressure as buyers target these markets in an attempt to access greater opportunities and to achieve higher returns. PRIME PROPERTY PERFORMANCE ALL SECTORS Prime Yields 8. 25% 2 7.5% 15% % 6.5% -5% % 5.5% % Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 PRIME YIELD RENTAL GROWTH CAPITAL GROWTH PRIME HEADLINE INVESTMENT YIELDS (DEC 2013) Out of town offices Retail Park (Bulky Goods) Regional City CBD Offices Industrial Estates Thames Valley Offices Large Distribution Centres Shopping Centres Prime Shopping Park City Offices Shops Foodstores West End Offices 2% 4% 6% 8% 1 PRIME RENT & YIELD MOVEMENTS TO DEC 2013 PRIME SAMPLE OF 75 CENTRES (18 IN CENTRAL LONDON) RENTAL GROWTH TO DEC 13 3 YEARS (PA) 1 YEAR 1 QUARTER Shops % 0.7% Industrial 0.2% 0.1% 0.1% Offices (all UK) 3.9% % Offices-Central London 6.6% 7.8% 2. AVERAGE PRIME YIELDS DEC 11 DEC 12 DEC 13 Shops 5.77% % Industrial 6.97% 7.11% 6.79% Offices (all UK) 6.88% 6.95% 6.33% Offices-Central London 5.45% 5.43% 4.8 % Growth pa 3

4 MARCH 2014 SECTOR S The Central London retail investment market continues to see record demand from a multitude of global buyers, but retail investors are also keen on well-configured high street units in the strongest UK regional centres and market towns and especially locations that have strong prospects for rental growth over the medium term. Investment activity in the shopping centre market in 2013 was at its highest level since 2007, with a number of significant deals being concluded in the final quarter of the year. Buoyed by the greater availability of finance, investors are increasingly looking at smaller shopping centres in secondary locations which have high yields and good potential for asset management. The out of town retail market is also seeing strong investor demand, driven mainly by institutions and private equity buyers. Prime supply is limited however, and this has been a key factor in maintaining downward pressure on yields across all segments of the market. Offices remain the most popular asset class among investors targeting the UK, accounting for over half of all investment transactions in Overseas investors are very active in the Central London market, while UK institutions are also competing aggressively for stock and made a number of key acquisitions in Q4. Downward yield pressures are evident in many Central London submarkets as investor demand spreads into alternative locations, with solid occupier demand and strong potential for rental uplifts. The regional office investment market continues to build momentum and, with the re-emergence of UK institutions in recent months, there is high competition for stock in the South East, Thames Valley and key UK cities. This increased competition and limited supply has resulted in more aggressive pricing for prime offices, with several rounds of bidding now commonplace and prime yields are under pressure across all sub-sectors. INVESTMENT PERFORMANCE COMPARED Annual Total Return Dec-03 Dec-04 PROPERTY (IPD MONTHLY) Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 EQUITIES (ALL SHARE) Dec-10 Dec-11 NET INVESTMENT & CHANGE IN OUTSTANDING BANK LENDING Prime Yields 8% 7% 6% 5% 4% 3% 2% 1% Dec-04 Dec-05 PRIME PROPERTY YIELD CHANGE IN OUTSTANDING BANK LENDING TO REAL ESTATE (YEAR-ON-YEAR, BILLIONS) Dec-12 Dec-13 GILTS (LONG TERM) Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 ANNUAL NET INSTITUTIONAL INVESTMENT Lending / Investment ( bn) There is intense demand from investors for prime UK distribution warehouses and multi-let estates that have long and secure income streams. In recent months however, investors have also started to target shorter income assets, while demand is also growing for secondary units that are close to major regional urban centres and key logistical hubs. This shift in demand is being driven by the lack of opportunities at the prime end of the market, while the strengthening occupational market has also encouraged investors to look further up the risk curve for suitable opportunities. Yields fell across all prime industrial sub-sectors in Q4 and are expected to remain under downward pressure, while yields for better secondary assets and locations may also see some yield compression in PRIME RENTAL GROWTH BY SECTOR Rental Growth pa 2 15% 1 5% -5% -1-15% -2-25% Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 SHOPS OFFICES INDUSTRIAL 4

5 MARKETBEAT ECONOMIC OVERVIEW The UK economy performed well ahead of expectations in H and momentum is steadily building. GDP growth was revised up from 1.5% to 1.9% year-on-year (y-o-y) for Q3 2013, while estimates from the Office for National Statistics indicate that the economy expanded by 2.8% in Q4 (y-o-y). The driving forces supporting this upturn in growth have been rising consumer confidence and spending, and to a lesser extent, the resurgent housing market. According to the British Retail Consortium, retail sales volumes in the three months to January were up 3.2%, compared with the same period a year earlier. This was the strongest growth since April 2011, while the total amount spent in stores in January was 5.4% higher than in January In the absence of any notable growth in real household incomes, the acceleration in consumer spending has been driven by consumers sharply reducing their savings levels. While the potential to reduce savings further is limited, a stronger labour market and lower inflation should boost household incomes in The recovery in the economy has also been driven by the services sector, which posted a robust PMI reading of 58.5 in December, reflecting the increased flow of new business and higher employment. The manufacturing PMI was also very strong at 57.3, buoyed by improved demand from key export markets. The construction sector continues to benefit from the vibrant housing market, particularly in the South East. Nevertheless, recent data from the Bank of England (BOE) showed that business lending slumped by 3.9% y-o-y in November, underscoring some of the challenges that remain and that the rebalancing of the economy is still in its early days. Despite this, the UK is expected to be the fastest growing economy in Western Europe in 2014, with Consensus Forecasts predicting growth of 2.6%. Businesses, in particular, are feeling very upbeat about the year ahead and with a growing backlog of orders, companies are increasingly willing to move ahead with plans for higher investment and employment. The strength of the UK recovery has increased pressure on the Bank of England (BOE) to start raising interest rates and has forced it to adjust its forward guidance policy. The previous policy linked interest rate hikes to reductions in unemployment, but the new version ties future policy decisions to a broader range of factors linked to economic performance. Furthermore, the BOE has argued that the lack of inflationary pressures inflation fell to 1.9% in January spare capacity in the economy and the prevailing headwinds at home and abroad justify the current low interest rate environment and that any future interest rate hikes would be gradual. ECONOMIC INDICATORS Pa rate / growth 6% 4% 2% -2% -4% -6% -8% Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 CPI INFLATION GDP GROWTH CHANGING FORECASTS FOR UK GDP GROWTH Forecast GDP Growth % % % 2013 ECONOMIC SUMMARY % E 2014 F 2015 F GDP Growth CPI Inflation Consumer Spending Corporate Investment Manufacturing Output Interest rates 3 month Interest rates 10 year Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 5

6 MARCH 2014 PROPERTY FINANCE UK property markets are now benefitting from a greater availability of real estate finance, with lenders buoyed by steadily improving property fundamentals and the stronger outlook for the economy. The lending landscape is marked by an increasingly diverse mix of active participants, with the previously dominant banks now seeing their share of the lending market being eroded by the increased presence of non-bank financial institutions, such as insurance companies, debt funds and private equity. Based on the findings from Cushman & Wakefield s European Real Estate Lending Review in Q1 2014, the number of active lenders in the UK has risen by 2 since Q1 2013, providing welcome liquidity to real estate investment markets as well as an improvement in loan application timescales. In the face of stiffer competition and improved risk tolerance, the all in cost of funds is at attractive levels for borrowers as providers continue to tighten margins to compete. Loan margins for senior debt on core product range between 175bps to 250bps, down from bps at the start of Furthermore, the lack of opportunities in core markets is encouraging lenders to move up the risk curve and target a broader range of geographies and sectors, including the secondary markets. Margins can range between bps for senior debt in non-core markets. Loan to value (LTV) ratios for senior debt were relatively stable at 60-65% in H2 2013, although a notable trend in recent months is that the definition between senior and mezzanine finance is becoming increasingly blurred, with a growing number of senior lenders often willing to lend on a whole loan basis, increasing the LTV to as high as 75% saw the return of the leveraged buyer as banks and other finance providers started to move away from refinancing and focus on new business lending. Much of this new business is focused on London, South East and key regional cities, with some lenders - and in particular the banks - still wary of the lack of depth and liquidity in regional markets. Nevertheless, the number of non-bank financial institutions actively looking for regional opportunities has increased markedly in recent quarters, while there has also been a rise in equity and mezzanine providers targeting the regions. There are a growing number of commercial and investment banks who are willing to provide development financing, even if the lending criteria remain strict. Pre-lets are still a prerequisite for many, while the quality of the tenant, borrower/developer and location is also crucial to securing finance. Very often, banks will only lend where the sponsor is an existing client. It was a strong finish to 2013 for the European commercial real estate (CRE) loan and REO (real estate owned) portfolio sales market, with robust activity being seen in November and December. Many banks and asset management agencies still have a long way to go in their deleveraging programmes and further strong activity is expected in 2014 as financing conditions improve and as more opportunities become available. Large US investment firms continue to be the most active buyers accounting for approximately 7 of all acquisitions in Nevertheless, there is now a greater selection of smaller portfolios coming to market, which has led to an increase in the diversity of potential buyers and several smaller local investors have paid premium prices to get a foothold in the market. YIELDS AND INTEREST RATES 2 15% 1 5% GILTS ALL PROPERTY EQUITIES BASE RATE 6

7 MARKETBEAT INDUSTRIAL The industrial market is attracting a broad range of occupiers and investors, buoyed by the rapidly improving economic backdrop and greater external demand for UK exports. The prime supply constraints that plagued the market in 2013 show little signs of easing however, forcing occupiers and investors to broaden their search criteria and consider well located secondary stock. Demand is particularly strong for large, good quality, modern logistics space, with supermarkets, online retailers, parcel delivery firms and other third party logistics companies all competing for stock. Given the very limited availability of such stock (less than 3 months Grade A supply according to Cushman & Wakefield), many of these requirements can only be fulfilled through the design and build market, which remains a key route to new supply for many expanding occupiers. Consequently, the competition for strategic land opportunities in optimal locations is high, with both developers and occupiers vying for the best sites. This has driven up prices in select locations and land values are now back up to, if not past, their pre-recession levels. The multi-let occupational market around the M25 has seen a notable improvement in activity in recent quarters. Rents are still generally stable but well located schemes are seeing increased demand and this is putting pressure on incentive packages. The lack of Grade A space is particularly acute in the South East and the availability of good quality second hand space is also diminishing in preferred South East locations. This has helped tip the market balance back in favour of landlords, and we expect increased pressure on rents and lease lengths in key industrial markets in London, Thames Valley and the South East throughout The industrial investment market is seeing high levels of demand, with UK institutions, property companies, overseas players and high net worth individuals all very active and many new entrants also competing hard for stock. Top targets include distribution warehouses and UK wide multi-let estates that are well-let and have secure income streams. The lack of opportunities continues to push demand out into the regional markets, with high demand for logistics assets in the Midlands in particular. In 2013, there was increased interest in properties with middle income streams of between 8 to 12 years, but the lack of opportunities and strength of the occupational market has forced investors to move up the risk spectrum and consider assets with shorter leases. Yields fell across all prime industrial sub-sectors in Q4 and are expected to remain under downward pressure throughout Amid increased demand, yields for better secondary stock are also under downward pressure, especially for assets that are located in close proximity to major urban centres. ANNUAL CHANGE IN INDUSTRIAL RENTS TO DEC 2013 South East Provincial North South East South West West Midlands Suburban London Scotland East Midlands Yorkshire & Humberside Wales North West PRIME INDUSTRIAL RENTS AS AT DEC 2013: (2,000 SQ.M UNIT) RENTAL LEVEL YEARLY GROWTH /SQ.FT/ YR /SQ.M/ YEAR 5 YEAR 1 YEAR London - Heathrow London - Romford London-Croydon Manchester Birmingham Bristol Leeds Newcastle Cardiff Edinburgh Glasgow PRIME INDUSTRIAL YIELDS AS AT DEC 2013 CURRENT YIELD 10 YEAR RECORD LAST QUARTER HIGH LOW London - Heathrow London - Romford London-Croydon Manchester Birmingham Bristol Leeds Newcastle Cardiff Edinburgh Glasgow East Anglia -1-8% -6% -4% -2% 2% 4% 6% 8% 1 7

8 MARCH 2014 REGIONAL OFFICES Leasing activity in the main regional office markets has improved markedly in recent quarters. The Thames Valley saw a surge in activity in H2 2013, which brought the annual take-up for 2013 to 1.8 million sq.ft - well ahead of the 10 year average of 1.45 million sq.ft. Elsewhere, demand is slightly more subdued, although the availability of Grade A space is diminishing in key centres and this has led to a hardening of incentives and is putting upward pressure on rents. The lack of prime stock has also resulted in a migration of demand to some out of town office locations and take-up levels in this segment of the market are increasing. While the availability of development financing is slowly improving, it has yet to result in any notable pick up in development activity in regional markets. Nevertheless, there are indications that some developers are becoming more confident and this, coupled with significant pre-let demand in key prime locations, is expected to trigger greater development activity over the coming months. Offplan pre-lets will also become more prevalent as larger occupiers implement longer term projects that had been put on hold. The regional office investment market is performing strongly, with 1.5 billion transacted across 89 deals in the fourth quarter. While UK institutions have been increasingly active in recent months, there has also been a notable increase in the number of overseas buyers targeting the regions, who are encouraged by the improving occupational backdrop and the good prospects for rental growth over the medium term. Much of the demand is still focused on well let assets, with secure medium to long income streams in the South East, Thames Valley and main regional cities, although there is growing interest in shorter term income assets in good locations, especially those that have potential for re-development. As some investors continue to search for higher returns however, demand is gradually filtering down into the best second tier and secondary markets. The strong competition for assets has put downward pressure on yields across all segments of the regional office market. Thames Valley yields fell 25bps to 5.5 over the fourth quarter, while regional out of town office yields hardened from 8.0 to 7.75%. There were a number of key deals transacted in Q4. These included Malaysian investor, Lembaga Tabung Haji, acquiring Leatherhead Office Park for 75.75mn at a net initial yield of 5.94%, while Union Investment Real Estate purchased One Snowhill in Birmingham for 125 million at a net initial yield of 6.25%. M&G bought Enterprises House, Uxbridge from SWIP for 52.5 million reflecting a net initial yield of 5.75%. ANNUAL CHANGE IN OFFICE RENTS AS AT DEC 2013 South West Suburban London North East Midlands North West Yorkshire & Humberside West Midlands South East Provincial East Anglia Wales Scotland South East West End City of London -2% 2% 4% 6% 8% 1 PRIME OFFICE RENTS AS AT DEC 2013 RENTAL GROWTH /SQ.FT/YR YEARLY GROWTH /SQ.M/ YEAR 5 YEAR 1 YEAR Reading Manchester Birmingham Bristol Leeds Newcastle Cardiff Edinburgh Glasgow PRIME OFFICE YIELDS AS AT DEC 2013 CURRENT YIELD 10 YEAR RECORD LAST QUARTER HIGH LOW Reading Manchester Birmingham Bristol Leeds Newcastle Cardiff Edinburgh Glasgow

9 MARKETBEAT LONDON OFFICES Total leasing volumes in the West End market were 837,000 sq.ft in Q4, which took the total take-up for 2013 to 3.7 million sq.ft. This was 46% ahead of the volumes recorded in 2012 and is 2 above the 10 year average. Leasing activity is buoyant across all West End submarkets, with high activity being seen in locations such as King s Cross, Paddington and Euston. While Media, Technology and Financial Services occupiers accounted for a large share of active demand in 2013, demand is now growing from a broader range of occupiers as the economic recovery filters through to all sectors. Prime supply constraints are growing across all submarkets however, with current West End supply standing at 4.2 million sq. ft - well below the long term average of 5.4 million sq.ft. This equates to a vacancy rate of 4.2%. There is 2.4 million sq.ft of speculative space under construction, with 1.4 million sq.ft due to be delivered in 2014, although much of this is already pre-let. Prime rents were stable at per sq.ft in Q4, but remain under pressure to rise across all submarkets. Average annual rental growth was 10.5% in the West End in 2013, with the strongest growth being seen in North of Oxford Street (12.5%) and King s Cross (26%) submarkets. Occupational supply levels are also diminishing in the City & Docklands market as high levels of take-up and limited development completions impact. The vacancy rate fell to 7.3% in Q4, which is below the long term average of 8%. Demand in the City market is particularly robust and is driven by Media & Technology companies, while Banking and Financial Services firms are also becoming more active. Leasing volumes in the City were just over 2.2 million sq.ft in Q4 - the highest quarterly volumes since mid Prime rents increased to per sq.ft in Q4; an annual increase of 4.5% and the first uplift since June The Central London office investment market is buoyant, with overseas investors and UK institutions competing aggressively for the best stock. Yield pressures are now building in many submarkets, with the high competition and low yields on offer in core locations triggering a migration of demand into neighbouring submarkets. Prime West End yields were unchanged at 3.75% in Q4, but some markets including Victoria, Soho, Covent Garden and Paddington all saw yields harden by 25bps over the quarter. Prime yields in the City & Docklands market were stable at 4.75% in Q4. LONDON OFFICE PERFORMANCE Prime Yields 7.5% % % % 4. Dec-04 Dec-05 PRIME LONDON OFFICE RENTS AS AT DEC 2013 PRIME LONDON OFFICE YIELDS AS AT DEC 2013 CURRENT YIELD 10 YEAR RECORD LAST QUARTER HIGH LOW Mayfair Victoria City Core City Fringe Midtown Paddington RENTAL LEVEL /SQ.FT/YR YEARLY GROWTH /SQ.M/ YEAR 5 YEAR 1 YEAR Mayfair , Victoria City Core City Fringe Midtown Paddington PRIME YIELDS OFFICE SUPPLY & DEMAND SUPPLY (MN SQ.FT.) RENTAL GROWTH TAKE UP (MN SQ.FT) DEC 12 SEP 13 DEC 13 Q Q Q City & Docklands West End Thames Valley Edinburgh Glasgow % 2 15% 1 5% -5% -1-15% -2-25% -3 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Rental Growth Pa 9

10 MARCH 2014 RETAIL HIGH STREET - CENTRAL LONDON International retailers account for a large share of active demand in Central London and are competing aggressively for the best space. Demand is well ahead of supply in the main thoroughfares, forcing some occupiers to consider opportunities in adjacent locations such as Piccadilly, Albemarle Street and Edgware Road, where rents are increasing as a result. Bond Street Zone A rents increased by 25% to 1,250 per sq.ft in 2013, while rents in Regent Street were up 4% and up 3.3% in Oxford Street. While the current supply of space remains limited, new development around major transport projects such as Crossrail will provide valuable new supply over the medium term. The investment market is still seeing exceptional demand from a growing collection of global investors. Asian buyers are increasingly prominent and were very active in 2013, targeting assets on Bond Street and Oxford Street. There is very little stock available however, and premium prices are being achieved amid intense demand for prime assets. On Bond Street, yields are now at 2.5 and are under pressure to fall further, with some buyers willing to bid yields lower, confident in the wealth preservation qualities of these assets and the prospects for further rental growth in the short to medium term. Indeed, yields remain under downward pressure in most Central London markets as investors broaden their search criteria to access stock. ANNUAL CHANGE IN SHOP RENTS AS AT DEC 2013 Suburban London North West Midlands North West Wales South East Provincial East Midlands East Anglia Yorkshire & Humberside South West Scotland City of London South East West End -8% -6% -4% -2% 2% 4% 6% 8% 1 12% HIGH STREET REGIONAL Trading conditions in the wider High Street market are gradually improving, although it is still very polarised, with some markets recovering strongly, while others are being hampered by stagnant wage growth and high levels of household debt. The prime in-town segment continues to benefit from stable occupational demand and rents, in contrast to the downward rental pressure, high vacancy and subdued interest being seen in many secondary locations where turnover leases are becoming more popular. Overall, the risks of further large retailer failures are subsiding and this will help stabilise some occupational markets, while also helping to boost sentiment among investors. PRIME RETAIL RENTS AS AT DEC 2013 NOTE: ZONING PRACTICE DIFFERS BETWEEN CITIES RENTAL LEVEL ZONE A /SQ.FT/ YR PRIME YIELDS AS AT DEC 2013 CURRENT YIELD YEARLY GROWTH /SQ.M/ YEAR 5 YEAR 1 YEAR 10 YEAR RECORD LAST QUARTER HIGH LOW London-West End 1,250 9, London-City 250 1, London-Croydon 170 1, Manchester 250 1, Birmingham 250 1, Bristol Leeds 250 1, Newcastle 250 1, Cardiff 215 1, Edinburgh 190 1, Glasgow 255 2, Note: /sq.m/year figures are on an equivalent non-zone A basis London-West End London-City London-Croydon Manchester Birmingham Bristol Leeds Newcastle Cardiff Edinburgh Glasgow

11 MARKETBEAT Investment demand is mainly focused on prime opportunities in the strongest regional centres and market towns, which have well-configured units, low vacancy, low re-letting risk and strong prospects for rental growth over the medium term. Investor interest is particularly high for assets in excess of 10 million which have secure long-term income. The lack of opportunities is these markets is leading to a broadening of investor demand however, and some investors will consider the better secondary stock or opportunities with asset management potential. CHANGE IN RETAIL YIELDS AS AT DEC 2013 PRIME RETAIL WAREHOUSE RENTS AS AT DEC 2013 BULKY GOODS OPEN CONSENT /SQ.FT/YR /SQ.M/YEAR /SQ.FT/YR /SQ.M/ YEAR London (Croydon) Manchester Birmingham Bristol Leeds Newcastle Cardiff Edinburgh Foodstores Solus DIY RW Glasgow Note: Rents are based on our opinions of open market letting for a hypothetical 7,500 sq.ft unit at prime location. Prime Shopping Park Shopping Centre PRIME YIELDS AS AT DEC 2013 CURRENT YIELD 10 YEAR RECORD LAST QUARTER HIGH LOW Shopping Centres Shops SHOPPING CENTRES 1% 2% 3% 4% 5% 6% 7% DEC-13 SEP-13 JUN-13 The occupational market remains robust in the best performing centres, although many poorly located prime and secondary schemes continue to struggle with weak demand and rising void rates. While prime rents have generally stabilised, subdued leasing activity is forcing landlords to remain flexible. Q was another very strong quarter for the UK shopping centre investment market, with a number of key deals being transacted. Total volumes for 2013 were in excess of 4 billion, the strongest performance since 2007 and significantly ahead of the 10-year average for transactions. In the largest deal of the quarter, F&C REIT bought the Bon Accord & St Nicholas Shopping Centre in Aberdeen from the Scottish Retail Property Partnership for 189m, reflecting a net initial yield of 7.4. This positive momentum is expected to continue in Investment demand is driven by a broad range of UK institutions, overseas investors, REIT s and private property companies, who are buoyed by the greater availability of finance and are now targeting good opportunities outside of the dominant schemes. RWP Bulky Goods RWP Open Consent RWP Shopping Park Solus DIY RW Foodstores OUT OF TOWN RETAIL The out-of-town market is slowly building momentum, helped by improving consumer sentiment and further signs of sustainable economic growth. Generally void rates have stabilised and are falling in some of the best parks as demand increases from a number of expanding fashion, footwear, furniture and discount retailers. There is still a good supply of second hand space, which is keeping rents in check and helping underpin the growth of these retailers. Food retailers have been less active in recent months as they focus more on smaller convenience stores. In a strong finish to 2013 for the investment market, a number of key deals completed, including M&G and Aberdeen AM s JV to purchase the Two Rivers Shopping Park in Staines for 210m at a net initial yield of 5.15%. Another key deal was London Metric s acquisition of the DFS portfolio for 175m at a net initial yield of 9.3%, which has good asset management potential. Prime yields were generally stable in Q4, with the exception of stand-alone retail warehouse yields, which fell 25bps to 6.25%. 11

12 MARCH 2014 RESIDENTIAL The UK housing market saw a significant improvement in the second half of 2013, with government initiatives in the mortgage market and rising confidence in the economy underpinning an increase in pricing and transactions. The Help to Buy scheme, in particular, has led to a considerable uptick in market sentiment across many regional markets. The second phase of the scheme was launched in Q and while it has primarily benefitted first time buyers, it has also encouraged house builders to increase activity, helping ease supply constraints. Other government initiatives have also helped boost the availability of mortgage finance. According to the Council for Mortgage Lenders, total gross mortgage lending was 177 billion in 2013 up from 130 billion in Nevertheless, this is still significantly down on the 363 billion recorded at the height of the lending boom in Gross lending is expected to improve further in line with better economic conditions, although lending levels are still not expected to exceed 200 billion per year over the short term, due to increased bank regulation and a more cautious lending environment. Based on data released by the Office of National Statistics, average UK house prices increased by 5.4% in the 12 months to November London continues to outperform - with prices up 11.6% during the period although there are signs that house price growth is now becoming more subdued in many Central London locations. Prices in prime non-central markets are rising strongly however, buoyed by healthy demand from domestic and overseas investors, while the lack of supply in the Greater London area is also underpinning prices. Indeed, price growth in locations such as Wandsworth, Barnes and Islington is expected to accelerate at a faster pace than London s core over the next few years. The resilience of the UK housing market appears to be largely supply related. Supply pressures have been building for many years, particularly in the South East, caused by strong population growth, falling average household sizes and modest levels of house building. Housing starts have averaged 140,000 since significantly less than government targets of 240,000 houses a year and as a result, the ratio of households to the stock of owner occupied houses has risen steadily over the past five years. This demand/supply imbalance appears to have put a floor under prices. House builders and developers have increased their development activity over the past year, but it is still significantly less than what is required and therefore this new supply is not expected to make any significant impact on pricing in the short term, especially in London. UK ANNUAL HOUSE PRICE INFLATION (ALL DWELLINGS) 25% 2 15% 1 5% -5% -1-15% -2 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 Source: Department for Local Communities and Local Government UK May-11 Aug-11 Nov-11 Feb-12 May-12 LONDON UK ANNUAL HOUSE PRICE INFLATION (BY BUYER) 15% 1 5% -5% -1-15% -2 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 FIRST-TIME BUYER Source: Department for Local Communities and Local Government Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 FORMER OWNER-OCCUPIER Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 12

13 MARKETBEAT HOSPITALITY The UK hotel market finished 2013 strongly, with London and most regional markets showing solid growth across key performance indicators. London is the strongest hotel market in the UK, with occupancy rates close to 9. Much of the robust growth in the London market is rate driven and average room rates were up 7.2% in the year to October 2013, according to HotStats. Ancillary spending per available room has also picked up in recent months, most notably from food and meeting room hire. LONDON HOTEL PERFORMANCE (YEAR ON YEAR CHANGE) 15% 1 5% Many regional markets are also performing strongly, buoyed by the improving economic outlook and the recovery in the domestic business travel market. This has increased demand for accommodation in the major regional cities, and in particular Birmingham, Manchester, Glasgow and Edinburgh. Hotels in some regional markets - most notably in the East of England, North East and West Midlands - are underperforming however, and are struggling to increase average room rates and to pass on higher costs to customers. -5% -1 Q1 13 Source: TRI Hospitality Consulting REVPAR Q2 13 TREVPAR Q3 13 GOPPAR Q4 13 The large number of hotel openings in 2013 particularly outside London is a positive sign of the growing confidence in the UK hotel market and especially in the fast growing budget sector. According to AM:PM, almost 14,000 new hotel rooms will be delivered in 2014, with well over half of those being in budget hotels. Both the corporate and leisure sectors are still value conscious and this is underpinning the strong demand for budget accommodation, especially in the regions. The budget sector s growing importance in the UK market was illustrated in the latest British Hotel Guest survey, which showed that Travelodge and Premier Inn are now the top two UK hotel brands in both the business and leisure travel sectors. PROVINCES HOTEL PERFORMANCE (YEAR ON YEAR CHANGE) 12% 1 8% 6% 4% 2% -2% There is also significant new development in the boutique hotel sector, with Intercontinental Group due to open a Hotel Indigo in Brighton in Q1 2014, while Starwood is opening its second Aloft branded hotel in Liverpool. De Vere is opening four of its business-oriented Village Urban Resorts in Aberdeen, Edinburgh, Glasgow and Portsmouth. Central London is another key market for new supply, with high activity being seen in fashionable sub-markets such as Hoxton and Shoreditch. -4% -6% -8% Q1 13 Source: TRI Hospitality Consulting REVPAR Q2 13 TREVPAR Q3 13 GOPPAR Q is likely to see a further structural shift in the way hotels are owned and operated. Increasingly, hotel chains are moving away from ownership models and are instead focusing on brand development and hotel operations, with the hotels owned by external investors. So far, this asset-lite strategy is giving the larger chain operators a competitive edge over smaller independent operators and is set to be a key trend going forward. 13

14 MARCH 2014 DECEMBER 2013 RENTAL GROWTH RETAIL EA EM N NW S SE SW W WM YH GB Base 5.4% 4.8% 4.5% 4.7% 4.8% 6.1% 4.7% 4.3% 4.7% 5.5% 5.6% 10 Years -1.4% -3.3% -2.4% -3.1% -0.2% 2.8% % -2.3% % 5 Years -4.3% -6.8% -5.3% -5.7% -2.6% 2.6% -6.2% -6.6% -6.9% -4.3% -0.4% 3 Years -2.6% % -2.5% -0.8% 4.2% -3.2% -2.5% -3.2% -1.8% 2. 1 Year -2.7% -4.9% % -0.8% 5.5% -2.3% -5.5% -0.7% -1.4% 2.8% 6 Mths -2.7% -1.3% % % -1.5% % 1.3% 1 Qtr -1.8% % % % OFFICE Base 5.8% 5.7% % % 5.6% 5.3% 5.8% 4.8% 5.4% 10 Years 2.8% 1.2% 0.7% % 3.8% 1.5% 2.6% -0.6% 1.6% 3.2% 5 Years 1.8% -1.9% -0.9% -0.6% 1.4% 0.1% -1.3% 1.8% -3.7% -0.9% 0. 3 Years % -1.4% % 5.4% -0.9% % % 1 Year 5.8% % 3.5% 6.4% -1.4% -0.7% 4.5% Mths % 2.3% % % 1 Qtr 1.7% % 1.1% 1.6% % % INDUSTRIAL Base 4.3% 4.5% 4.7% 4.4% 4.8% 4.5% 4.7% 4.2% 4.8% 4.4% 4.4% 10 Years 1.4% 0.3% 0.8% 0.7% 2.7% 0.1% 0.5% 0.2% 0.4% 0.7% 0.5% 5 Years 1.5% 0.3% -0.8% 0.6% 0.9% -0.7% 0.1% -2.2% -0.2% -0.7% -0.3% 3 Years % % 1.4% 0.2% 0.8% -3.6% -0.3% % 1 Year 3.1% % % % 1.6% % 6 Mths % % % % 1 Qtr % % AVERAGE PRIME YIELDS RETAIL Dec % 6.25% % 5.92% 5.45% 6.05% 6.67% % 5.9 Mar % 6.63% 6.71% 5.92% 5.45% % 6.55% 6.19% 5.96% Jun % 6.42% 6.56% 6.63% 5.92% 5.36% 6.25% 6.83% 6.55% 6.06% 5.9 Sep % 6.42% 6.56% 6.58% 5.75% 5.21% 6.25% 6.83% 6.55% % Dec % 6.33% % 5.75% 5.19% % % OFFICE Dec % 8.08% 7.25% 6.88% 6.33% 6.71% 7.94% % 7.42% 6.95% Mar % 8.08% 7.25% 6.88% 6.33% 6.65% 7.94% % 7.42% 6.91% Jun % 7.83% % 6.33% 6.41% 7.69% 6.75% 6.92% 7.17% 6.68% Sep % 7.67% % 6.17% 6.24% % % Dec % 7.42% % 5.92% 6.05% 7.25% % 6.92% 6.33% INDUSTRIAL Dec % 6.67% 7.81% 7.17% % 7.15% % 7.11% Mar % 6.67% 7.81% 7.17% % 7.15% % 7.11% Jun % 6.58% 7.75% % 6.95% 7.33% 6.85% 7.13% 6.96% Sep % % 6.88% 8.42% 6.35% 6.95% 7.33% % 6.88% Dec % % 6.75% 8.08% 6.35% 6.95% 7.33% % 6.79% GEOGRAPHICAL KEY FOR ALL GRAPHICS EA = East Anglia NW = North West SE (ex-l) = South East (ex London) WM = West Midlands SL = Suburban London EM = East Midlands S = Scotland SW = South West Y&H = Yorkshire & Humberside C of L = City of London N = North SE = South East W = Wales WE of L = West End of London GB = Great Britain 14

15 MARKETBEAT RESEARCH SERVICES Cushman & Wakefield research staff are located throughout the world with the EMEA service co-ordinated in London, the Americas in New York and Asia in Shanghai. Research provides a strategic advisory and supporting role to clients and other departments within the firm with extensive and continuously updated information systems covering property, economic, corporate and social trends. Consultancy projects are undertaken on a local and international basis. We provide in-depth advice and analysis, producing detailed market appraisals on current and future trends for developers, investors and occupiers. We also advise on location and investment strategies and portfolio performance. Typical projects include a mix of the following: Location analysis, ranking and targeting for occupation or investment Future development activity and existing supply/competition Demand analysis by retail/industry sector Rental analysis, forecasts & investment & portfolio strategy Floorspace audits, tenant-mix assessment & catchment/ expenditure analysis Retailer, occupier and consumer surveys Pedestrian flow analysis & local employment studies For industry-leading intelligence to support your real estate and business decisions, go to Cushman & Wakefield s research and insight pages at cushmanwakefield.co.uk. For more information about C&W Research, contact: David Hutchings Head of EMEA Investment Strategy +44 (0) david.hutchings@eur.cushwake.com Cushman & Wakefield is the world s largest privately held commercial real estate services firm. The company advises and represents clients on all aspects of property occupancy and investment, and has established a preeminent position in the world s major markets, as evidenced by its frequent involvement in many of the most significant property leases, sales and management assignments. Founded in 1917, it has approximately 250 offices in 60 countries, employing more than 16,000 professionals. It offers a complete range of services for all property types, including leasing, sales and acquisitions, equity, debt and structured finance, corporate finance and investment banking, corporate services, property management, facilities management, project management, consulting and appraisal. The firm has nearly $4 billion in assets under management globally. A recognized leader in local and global real estate research, the firm publishes its market information and studies online at This report has been prepared solely for information purposes. It does not purport to be a complete description of the markets or developments contained in this material. The information on which this report is based has been obtained from sources we believe to be reliable, but we have not independently verified such information and we do not guarantee that the information is accurate or complete. Published by Corporate Communications Cushman & Wakefield, Inc. All rights reserved. Cushman & Wakefield, LLP Portman Square London W1A 3BG 15

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