Outlook for capital and rental value growth

Prime offices and prime retail are expected to perform strongly over the next five years due to increased demand.

25 February 2014, Words by Marie Hickey

 

■ The robust investor appetite being seen for offices, both in London and increasingly regionally, is being supported by a strong outlook for capital and rental value growth.

■ Prime offices top our forecasts for commercial property through to 2018. Year end capital and rental growth is forecast to hit 10.1% and 4.5% respectively. Capital and rental value growth through to 2018 is expected to average 5.5% and 4.4% per annum respectively.

■ For the top regional office markets falling vacancies and recovering tenant demand, coupled with little or no speculative development activity, will fuel a rental recovery. The yield spread compared to London offices should entice further investment driving capital value growth.

■ Prime retail is also expected to deliver some strong growth with London's core retail pitches likely to offer the best prospects for double digit rental growth. Over the next 12 to 18 months, prime Zone A rents across the key London pitches are expected to increase by an average of 15.3%, with the luxury enclaves leading.

■ On a cross sector basis, however, agricultural offers the best prospects. Savills forecasts for All Farmland point to average annual growth in capital values and rents of 6.0% and 7.0% respectively through to 2018 with a 200 basis point uplift for top quality farmland.

Table 2
Risk of imminent rate rises diminishes

■ The faster than expected growth in the UK economy last year has already become apparent in consumer, business and development sentiment surveys.

■ But what about interest rates? Future increases had been flagged as an imminent risk to confidence as unemployment crept closer to the 7% threshold set by the Monetary Policy Committee (MPC).

■ However, this potential 'risk' looks set to be delayed following the Bank of England's (BoE) scrapping of the guidance that linked rates to unemployment. The BoE also revised its 2014 forecasts for the UK economy upwards from 2.8% to 3.4%.

■ Inflation (as measured by CPI) came in from 2.0% to 1.9% in January, its lowest level since November 2009, which has further mitigated the need to increase rates. As a result, the general consensus is that rates are unlikely to rise before next year's election.

■ With interest rates forecast to reach 2% over the next three years, relatively low historically, the resultant yield spread between property, Gilts and five year Swaps is likely to ensure that property remains an attractive asset. As a result this will intensify the downward pressure on both prime and secondary yields.

Graph 2

 

 
 

Key Contacts

Mark Ridley

Mark Ridley

Chief Executive Officer
Savills UK & Europe

Savills Margaret Street

+44 (0) 20 7499 8644

 

Marie Hickey

Marie Hickey

Director
Commercial Research

Savills Margaret Street

+44 (0) 20 3320 8288

 

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