Market in Minutes:
UK Commercial – February 2017

UK Commercial Market in Minutes
UK Commercial

21 February 2017, words by Steven Lang

Yields trend lower with more clarity of Brexit timing

Yields slightly lower

■ Average UK prime yields have continued to fall since peaking in summer last year. The January data shows some downward trend arrows as well as some sectors moving lower. For example, the regional hotel yield showed the first fall since April 2015 and the restricted retail warehouse yield is now back to where it was at the beginning of 2016.

 

TABLE 1

Prime yields

 
Table 1

Source: Savills Research

■ Overall, despite the decision for Brexit, UK prime yields were only 22 basis points higher, at the end of last year, compared to the end of 2015. They peaked at 35 basis points higher during August 2016.

■ The UK investment volume for 2016 was £51.4 billion, which represented a 28% annual fall. However, this level was 12% above the 10-year (06–15) average of £45.9 billion.

■ The chart below, presenting UK commercial property investment on a quarterly basis, illustrates the investment slowdown post-EU referendum. For most years, the final quarter usually sees an increase following the summer. 2016 saw a larger than average 39% rise in Q4 compared to a 25% rise in Q4 2015. The driver of this was the 47% share for overseas investors, which rose from a 40% share during Q2 and Q3. Currently, in $USD terms, Sterling is still 16% below the pre-referendum level, which remains a key driver of overseas interest in UK property.

■ At £18.4bn, the office sector accounted for 36% of the total volume of UK investment in 2016, which is slightly below the five- and 10-year average. There has been a higher than average proportion within the 'alternatives' sector during the past few quarters, including student and assisted living accommodation assets.

■ Overall, despite global political events of the past eight months, with more European elections to come, the attractiveness of UK commercial property to buyers remains.

GRAPH 1

Quarterly UK volumes recovered during Q4 2016; overseas appetite remains resilient

 
Graph 1

Source: Savills, Property Data

Property values at a turning point?

■ Assessing monthly and annual change in investment performance provides the best indicator of where the short-term trend is heading.

■ Graph 2 shows UK capital value growth. The monthly impact following the EU referendum decision is clear to see in 2016. However, December saw a recovery of monthly performance by posting a 0.8% increase. This was back to the level seen in December 2015. The annual measure shows a 'levelling' of negative growth and is likely to show positive annual growth by the end of this summer.

GRAPH 2

The effect of Brexit is clear, but capital growth decline has levelled

 
Graph 2

Source: MSCI

State of the nation

■ The sentiment of consumers and corporates present a mixed picture. With more clarity on the impact of the EU referendum and the impending trigger of Article 50 (by end-March) the market has seen the corporate level of sentiment move back in to positive territory. This bodes well for UK corporates accepting rental growth and acquiring floorspace.

■ For consumers, the key driver of the UK economy, in terms of GDP growth, there is still a degree of nervousness based upon the GfK measure shown in Graph 3. However, more positively, the level of consumer credit growth remains in double-digit territory and unemployment is at an 11-year low. The result has been the Bank of England revising its GDP growth expectations upwards for this year. Commercial rents normally rise during periods of GDP growth.

■ The question remains regarding inflation and whether inflationary impacts will dissipate during the year. The financial markets have priced in a 35% chance of an interest rate rise this year, down from a 50%+ chance in January. A rise in the base rate, too soon, would be damaging.

■ Post referendum, the drive is to make the UK one of the most competitive global locations to start, grow or maintain a business here.

■ Looking towards these longerterm drivers of the UK economy, the recently released Industrial Strategy by Government is a welcome addition to the debate to highlight the opportunities for UK businesses through increased funding. This will have a very positive impact on the commercial property markets throughout the UK.

■ This significant push is to close the gap across the UK in terms of productivity of companies, people and places. Again, this will require a drive to ensure that appropriate work space is created, in all parts of the UK, to enable this strategy.

■ Growth in R&D spending, capital investment and infrastructure spend all combine to ensure that the aims are achieved. It goes without saying that the commercial property market must respond to enable this drive and commitment set out by Government. Opportunities around new infrastructure projects will emerge as a result.

GRAPH 3

Mixed signals from corporates and consumers

 
Graph 3

Source: GfK, CBI

 
 

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Key contacts

Steven Lang

Steven Lang

Director
Commercial Research

Savills Margaret Street

+44 (0) 20 7409 8738

 

Mark Ridley

Mark Ridley

Chief Executive Officer
Savills UK & Europe

Savills Margaret Street

+44 (0) 20 7499 8644