London Commercial Property Outlook Positive Despite UK Budget Cutbacks

UK budget cuts will take a bite out of markets relying on the public sector, as regional and sub-sector disparities grow more pronounced. Overall, London’s retail and office …

UK budget cuts will take a bite out of markets relying on the public sector, as regional and sub-sector disparities grow more pronounced. Overall, London’s retail and office markets are proving resilient, but Central London is a standout for rental growth. See the following article from Property Wire for more on this.

Despite concerns about government spending cuts in the UK, the London commercial property market’s retail and office sectors are in remarkably good shape, a new report reveals.

But stark performance gaps are opening up geographically, according to the latest quarterly commercial property market outlook from leading chartered surveyors and property consultants Cluttons.

Looking ahead, the commercial property market faces a more uncertain future over the next 18 months. Fragile economic growth compounded by the impact of the government’s Comprehensive Spending Review, is likely to reinforce the disparities in the market, it also points out.

‘Following a positive first half of the year the market is undoubtedly showing signs of turning, with stark performance gaps opening up geographically amongst investor groups, in particular the have and have nots in funding, and occupiers,’ said John Barrett, head of commercial valuation

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‘Our central case (for a balanced UK portfolio with Central London exposure) is for capital growth to be negligible while total returns, although reduced, to remain positive at around 6% in 2011 and rise cautiously thereafter to 8.5 to 9.5% for 2012 to 2014,’ he explained.

‘However, the All Property average performance will mask wide variations between market sub-sectors. We forecast that offices will consistently outperform other sectors over the next five years, but the two tier market is set to exaggerate further,’ he added.

The report shows that West End offices have seen further hardening of yields while prime offices yields outside Central London have moved the other way. Headline rents in the City remain at £55 per square foot, but have edged up in the West End and are now at £85 per square foot, driven by a severe shortage of space and a lack of ongoing development.

‘We are only forecasting positive rental growth of any substance in the Central London office market during 2011 to 12. Outside London limited or negative rental growth persists.  Inevitably those regional markets which have witnessed up to half of their take up coming from the public sector in recent years look more vulnerable, with little business growth evident to take up the slack,’ said Barrett.

‘While market conditions remain in favor of tenants, the increased use of turnover rents and incentives presents challenges in establishing true rental levels. Nevertheless, we expect retail rents to fall back by an average of 0.6% pa until the end of 2012, but the bulk of this loss will be over the next 18 months as retailers struggle their way through a difficult consumer environment. Inevitably there will be considerable variation between regional and local markets with only the best schemes and towns attracting the cautious attentions of retailers and investors alike,’ he added.

Strong demand for prime central London retail space is driving rental values upwards.  Cluttons forecasts Central London will again buck the more general trend, delivering positive rental and capital growth over the next five years.

But poor confidence continues to impact on capital spending and investment in the industrial sector. Occupier market conditions are likely to worsen further over the coming year with a knock-on impact on industrial vacancy rates. With falling availability of new floor space, some property developers with institutional backing are now buying sites at 40% below the 2007 peak.

‘Although speculative development remains unlikely for a while, there is more active trading of development sites. Design and build packages for occupiers are likely to increase as both the economy and demand improves. Yields are likely to stabilize over the remaining six months although confidence in the sector will be dependent on a more positive economic story,’ he concluded.

This article has been republished from Property Wire. You can also view this article at
Property Wire, an international real estate news site.

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