The UK commercial listing market is experiencing a three tier recovery with offices and retail living in different worlds, according to the latest analysis report.
All listing capital growth increased by 0.8% in May month on month, up from the 0.5% reported for April, says the Knight Frank June market outlook report.
Offices saw the highest capital growth at 1.5%, and retail the lowest at 0.2% while the 12 month total return fell again to 17.6% and investment volume from January to May was £23.6 billion, up from £17.8 billion for the same period of 2014.
‘The winter and early spring were a time of deceleration for commercial listing, following the heady capital growth seen in 2014. While in May IPD’s capital growth index gained momentum, the improvement was not evenly spread across the sectors,’ said James Roberts, Knight Frank chief economist.
The report analysis points out that offices surged ahead, industrial achieved a less dramatic increase, and retail barely saw any improvement. Roberts explains the disparity is probably due to the fact that in recent years industrial has enjoyed a fillip in the occupier and investment market from the rise of e-commerce but that is not ‘news’ any more.
‘Possibly investors now view the internet effect as priced in, taking some of the heat out of the market. This is perhaps a healthy downwards gear change, especially as the internet is no longer expanding its market share in retail as aggressively as a few years ago,’ he explained.
He also pointed out that in 2000 the office market became overheated in London and the South East, as listing investors and developers overestimated the growth prospects of tech firms. ‘Hopefully what we are seeing is a soft landing for industrial following its e-commerce boom of recent years,’ he added.
But he also said that explaining retail listing’s under performance is, however, getting harder. ‘After all, the UK retail sales figures have been robust for some time, and the consumer has done much to support GDP growth by compensating for sluggish export demand and a retrenching government. Plus, there are the new occupier groups and shopping formats that have emerged to meet changing consumer trends, such as cafés, mini supermarkets, and click and collect. These should be compensating for problems elsewhere in the sector. Perhaps the explanation is to be found in leasing market fundamentals,’ he explained.
So far this year the UK shop vacancy rate has hovered around the 13% mark according to Local Data Company. This is in marked contrast to the steady decline in vacancy rates in many UK office markets, particularly in London and the South East where levels are in most cases lower than in 2007.
‘These dynamics are shaping rental growth, which is reasserting itself significantly in the office market, and barely in existence for retail. Admittedly, the rental growth for London and the South East is the driving force behind the IPD office figures, but there are signs this is spreading to the major regional city centres,’ said Roberts.
‘Consequently, rather than investors are missing a trick, it appears the weaker capital growth for retail is underpinned by leasing market fundamentals. Supply remains stuck at an elevated level, and probably dependent upon there being far less new development to bring stock in line with demand, unless some new occupier group appears that energises the sector in the future,’ he added.
In contrast, rental growth for IPD offices peaked at 8.6% on a 12 month basis in August 2007. Today the figure stands at 7.8% and rising, and London will power the IPD offices figure through that previous peak by the end of the year.
The report says that in Victoria, for example, the vacancy rate is just 2.4%. The development pipeline in London has been slow to respond to the pick-up in office demand, perhaps due to the general election, which is pushing up rents.
In the financial sector in particular, occupiers are reviewing which business functions need to be in the capital, and other UK cities are starting to benefit. Investors may take the view that there are plenty of further opportunities to explore in the outperforming office sector before revisiting the more embattled parts of retail, it concludes.
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Source: Property News Spain