UK Commercial Outlook
The Core 8 markets transacted record volumes in 2018, with £7 billion traded in commercial real estate; the highest level in over a decade. The Western Corridor alone transacted £4 billion, which included four deals over £100 million. A key focus was the trading of prime assets as well as ‘office-mania’ with transactions in commercial offices accounting for close to 40% of the transactional volumes in the region.
The Big 6 markets transacted a further £2.9 billion with seven deals over £100 million and an additional eight over £50 million, enforcing a strong year for the regional markets and appetite for larger lot sizes.
Overseas investors continued to be active, accounting for 55% of transactions over the last 12 months, aided by the weakening of sterling over other major foreign currencies.
Foreign investors maintain a strong appetite for the commercial lots, accounting for 67% of volumes traded over £50 million in the Big 6. UK investors remained acquisitive, accounting for more than double the number of transactions of overseas investors in the previous year. Looking ahead over 12 months, the trend of foreign investment into the regional markets is expected to continue. This rental demand will continue to thrive, focusing on prime assets with investors seeking steady and predictable income streams. The availability of suitable product will remain thin, with motivated sellers in short supply. Demand for ‘risk on’ assets will remain tempered against the backdrop of Brexit negotiations.
The overall effect of strong demand and tight supply is a forecast upward price pressure on commercial real estate throughout the UK, but particularly focused in key areas.
Robust GDP with Modest Growth
The UK economy has maintained solid GDP which has encouraged expectation for growth within commercial property pushing estimated annual growth within the asset class to 3.7% across the nation this year. Positive figures are driven by the business and financial services sector which has consistently expanded. Global economic growth is at its highest rate since 2011, which is expected to boost UK exporters over the coming year.
Domestic inflation concerns linked to the post-referendum depreciation of the pound have moderated since the middle of 2017, moving down quarter by quarter. Further easing is expected in the short term, which will support retail sales and ease the pressure on real wages. On the other hand, the global environment is gradually becoming more inflationary, with expectations of base rate rises and increasing bond and swap rates. This is unlikely to impact on prime rental yields, given the weight of money targeting property and the spread with gilt rates, but it may begin to affect risk weightings and secondary yields as the year progresses.
Record Take Up Levels
The Core 8 markets have witnessed a spectacular year as take-up volumes reached 8.1 million sq ft, the highest level since 2000. This growth was driven by four cities: Birmingham, Edinburgh, Leeds and Manchester, which each saw over 1 million sq ft of space leased over the year, accounting for 78% of overall Big 6 take-up. The letting of significant amounts of space this year to the GPA (Government Property Agency), which secured almost 800,000 sq ft in Leeds, Birmingham and Edinburgh, was a key factor. However, even without the GPA transactions, Big 6 take-up would be 14% ahead of the 10 year average, underlying the strength of performance over the year.
While the Public Sector accounted for almost 30% of take-up over the last 12 months, the flexible workspace sector, which is expanding rapidly all over the globe, was also very active in the Big 6 cities this year.
Pre-letting continued to remain a major feature of the Big 6 markets, with almost 1.5 million sq ft agreed in 22 deals, the highest on record. The trend for pre-letting space ahead of completion will continue, given the level of demand and the shortage of readily available space.
Vertigo Forecast Commercial Volumes (£ Millions)
Across the Big 6 cities there is currently 1.5 million sq ft of new or refurbished space under construction and due to be delivered over the next 12 months, with a further 1010,000 sq ft expected in the following year. The majority of this space is in the north of the UK. Strong take-up in has increased the pressure on Big 6 vacancy rates, which have declined year-on-year from 6.8% to 5.8%.
Rising building costs and limited appetite for risk have encouraged refurbishment of existing space and increase square footage of existing properties rather than speculative development. Major refurbishments accounted for 85% of new space delivered last year, compared to just 16% the year before.
Good quality space is in increasingly short supply, with Grade A vacancy across the Big 6 standing at just 1.7%. Although the pressure is more pronounced in areas such as Manchester, Yorkshire and Bristol, there remain extremely low supply pockets around the UK.
As a result of the strong demand for space and limited supply across the Big 6, rents have been consistently rising in a number of locations in the UK. The North West and Yorkshire is leading the way with a 19% increase over the year to finish at £42.50psf. Rents also increased in the Midlands, Scotland, and parts of the south as robust market activity boosted rental values. The outlook for the next 12 months is for this growth to maintain with supply shortages likely to persist, driving forth the incline on rental tone.