UK commercial property: strengthening economy buoys commercial property

Citation

(2000), "UK commercial property: strengthening economy buoys commercial property", Facilities, Vol. 18 No. 3/4. https://doi.org/10.1108/f.2000.06918cab.027

UK commercial property: strengthening economy buoys commercial property

UK commercial property: strengthening economy buoys commercial property

Keywords: Economic growth, Property markets

Strengthening economic activity is lifting occupier demand in the commercial property market. Tenant demand for property has improved and, coupled with an acute shortage of quality floorspace, has helped to support rental growth. Institutional investment in property was subdued in the first half of the year but more timely data show investor confidence in the market rising, which bodes well for capital growth.

There has been a slight moderation in office rental growth in recent months. Richard Ellis St Quintin (REStQ) figures showed annual rental growth stabilising at 5.5 per cent in August, compared with 5.7 per cent in July. Better economic conditions are helping to support an increase in tenant demand for office property, with the RICS commercial market survey showing take-up rising in 99Q3. However, the recovery masks regional discrepancies with a firm London market hiding more subdued demand conditions elsewhere.

Sentiment among office occupiers has sharply improved in Central London. According to the RICS survey, lack of supply is helping to maintain rental growth. However, Ingleby Trice Kennard data show a constructive picture with availability in the specific "City of London" area picking up over the summer months one-year ago levels, showing the first increase in six years. This suggests that development activity is helping to raise supply. A similar out turn may be emerging in Central London as a whole as chartered surveyors expect a strong increase in new Central London office development over the next year.

The retail sector has benefited from a strengthening domestic economy which has helped to raise consumer confidence. High street retail rental growth has picked up in recent months to approximately 5 per cent on an annual basis, though growth in retail warehouse rents has been more moderate at 2.3 per cent, according to REStQ. Data from the RICS Commercial market survey show take-up of retail property rising marginally in 99Q2. The slowdown in demand should prove temporary, as chartered surveyors are expecting demand to rise at a faster pace in 99Q4.

Looking at medium-term prospects, rents in retail property are expected to be supported by improving demand conditions but also by declining availability of floorspace. The RICS commercial survey indicates that a growing proportion of surveyors envisage an increase in rents in the retail warehouse sector, but will lag behind prime property. The caution of large multiple retailers is still impacting on the warehouse sector due to strong downward pressures on goods prices.

Industrial property demand in 99Q3 has exceeded expectations, according to RICS commercial market survey data. Rising occupier demand, and reduced supply of industrial property, has helped annual rental growth to pick up slightly to 4.3 per cent in August from a low of 3.5 per cent in January, according to REStQ.

Moreover, chartered surveyors are confident that rents in the sector will rise over the next quarter, with largest increases in prime property. Demand for distribution centres has shown a sharp turnaround in 99Q3 as uncertainty on transport costs are outweighed by greater activity in the retail and service sector. There has been a noticeable improvement in capital growth for the three-month period to August, particularly in the office sector. On the other hand, institutional interest in the property sector waned in the first half of the year compared to the last six months of 1998. This is not surprising, as the institutional data reflect investment decisions taken during a period of deteriorating economic conditions late last year.

A more timely gauge of investor sentiment comes from the September Merril Lynch Fund Managers' Survey, which showed the strongest level of buying interest for property since early 1998, and is coinciding with accelerating capital growth. Rising investor confidence has also traditionally augured well for a drop in commercial property yields. However, it may be more difficult for yields to fall over the near term as gilt yields have risen sharply this year, by around 1 per cent. Looking further ahead, long-term interest rates may begin to decline again as inflation fears subside, helping property yields to follow.