Next year will bring both excitement and challenge for the commercial property investor in the UK, with the forthcoming general election and the debate on the timing and pace of the inevitable rise in interest rates, which could both have an impact on the industry. However, we expect that the market will still offer opportunities to suit both risk-averse and risk-embracing investors.
In London, although yields in the core are close to historic lows, the reduced level of availability will continue to deliver strong rental growth. We expect to see a maintained level of strong demand from risk-averse international investors for best-quality stock, with the City of London still looking comparatively cheap, and some edge-of-core West End submarkets that are currently starved of new-build office stock.
While the rental recovery is well advanced in London, the UK regions are still very early in the cycle, and this will continue to drive a steady growth in investor interest in non-London locations in 2015. This year we have seen the largest proportion of asset purchases outside London since 2006 at £21.4bn, and we expect this trend to continue into 2015, driven both by the desire to capitalise on the wider-than-normal yield spread with London, and by the nascent leasing
market recovery.
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Next year will bring both excitement and challenge for the commercial property investor in the UK, with the forthcoming general election and the debate on the timing and pace of the inevitable rise in interest rates, which could both have an impact on the industry. However, we expect that the market will still offer opportunities to suit both risk-averse and risk-embracing investors.
In London, although yields in the core are close to historic lows, the reduced level of availability will continue to deliver strong rental growth. We expect to see a maintained level of strong demand from risk-averse international investors for best-quality stock, with the City of London still looking comparatively cheap, and some edge-of-core West End submarkets that are currently starved of new-build office stock.
While the rental recovery is well advanced in London, the UK regions are still very early in the cycle, and this will continue to drive a steady growth in investor interest in non-London locations in 2015. This year we have seen the largest proportion of asset purchases outside London since 2006 at £21.4bn, and we expect this trend to continue into 2015, driven both by the desire to capitalise on the wider-than-normal yield spread with London, and by the nascent leasing
market recovery.
Office take-up in the top nine regional markets – Manchester, Glasgow, Bristol, Cambridge, Cardiff, Leeds, Birmingham, Edinburgh and M25 – is expected to increase by an average of 11% in 2014 compared with 2013 and we predict this level of occupier activity will continue into 2015 as business confidence and investment continues to recover. However, the biggest driver of outperformance in the UK regions will be around the level of undersupply in these markets, with development completions likely to be 85% below average next year.
In the retail markets, the recovery will become more widespread as real earnings begin to recover. Much of this recovery will be linked to the state of the local housing market, and we expect to see a 5% rise in DIY sales next year. This, combined with the internet-friendly nature of the asset class, will lead to an uptick in retailer demand for the better bulky goods retail warehouse parks. Strong high streets and dominant shopping centres will also start to outperform.
Investors who remain bearish on the impact of the internet on retailing would be well advised to look closely at logistics, where the bulk of take-up this year has been by retailers and manufacturers, who accounted for 49% and 29%, respectively. In terms of locations for this sector, we continue to favour hubs in the centre of
the country and around the M25, as well
as local multi-let estates close to
affluent suburbs.
Overall in 2015, the chance to ride passively on the back of yield hardening will diminish. The best performance will come from a bottom-up understanding of where local markets and sectors are in the rental cycle, with development outside London looking increasingly attractive.
Mark Ridley is chief executive at Savills UK & Europe
