With the beginnings of a “proper” recovery anticipated by 2014, the 12 months ahead will be all about clinging on as the economic clouds dissipate. Over the next four pages, exclusive research by Jones Lang LaSalle highlights the potential sector danger zones and safer havens for 2013. Then, on page 34, we place our bets on the people, companies and key announcements to look out for over the coming year
Welcome to 2013, or rather 2012 part two. The next 12 months is expected to round off a two-year transition period – bridging the gap between the depths of economic turmoil and the much-mooted “proper” recovery expected in 2014-15.
That is the good news – a safer, more stable market and economy is now in sight. The bad news is that not everyone will survive long enough to see it, as more consolidation and company collapses are anticipated in 2013, painfully close to the emergence of
easier times.
For the immediate future, growth predictions remain subdued, with European and US economies still in crisis. While we may be on the home stretch, it is riddled with hurdles and only the strong will survive.
This sector-by-sector breakdown of the likely patterns and trends in 2013 by Jones Lang LaSalle should help you get a heads up if not a headstart.
The overall economic outlook
The Jones Lang LaSalle research predicts subdued growth in 2013, with just a 1% rise in GDP. But the expectation is that there will be some signs of improvement compared with 2012. The report says: “The next 12 months are unlikely to bring a dramatic turnaround. But in a year’s time, the foundations for recovery should be in place. For property markets, the implications are clear. Demand will respond slowly to the economic thaw as occupier confidence is rebuilt. Even with limited quality space in many markets, rents are unlikely to see much uplift outside central London office and retail. The fall in IPD capital values has slowed of late, but further outward movement in average yields is likely, at least at the start of next year. Cautious global investors are likely to stick to prime buildings in liquid international markets, implying limited interest outside of core assets in the capital.”
Positives:
• Gradual improvement in consumer demand as real incomes benefit from higher employment and lower inflation.
• Strong corporate balance sheets are predicted to boost business investment as sentiment slowly rebuilds.
• Growth is expected in London and the regions, despite the latter bearing the brunt of the UK recession.
Negatives:
• Confidence will remain fragile and any upturn in demand is likely to be faltering, at least until later in 2013.
• More austerity is expected as there is little support for further monetary relaxation and consumer deleveraging remains an ongoing challenge.
• Global uncertainties in the US and Europe will prevent any real or full recovery.
View from the expert
Dennis Turner, former chief economist, HSBC: “Although George Osborne is probably right to claim the worst is behind us, growth in 2013 will remain slow and unevenly distributed in terms of regions and industries. Despite 2013 being the fourth year of ‘recovery’, activity will still be some way short of business as usual. The biggest risks to the UK are from overseas – in particular, the eurozone debt saga and the US fiscal cliff, both of which could be sorted given a determined political will.”
Capital markets
• Development will make a comeback in central London in 2013. Interest from investors in the capital will continue during the next 12 months, with a primary focus on prime assets. JLL predicts that pricing will be competitive for those with equity, given the lack of finance that is available for development. This will result in more overseas capital looking for development opportunities. The JLL report states: “It is expected, though not yet proven, that the new entrants to the market will have longer hold periods than traditional UK institutions or funds and therefore, in our view, it is unlikely that much of the prime product they have acquired will return to the market in the short term. As a result, while demand for assets is increasing, the pool of prime product is reducing. This will maintain pressure on prime yields, which are expected to hold firm at their current low level.”
• Alternative sectors are set to continue to grow… The wall of capital targeting prime, central London offices and retail or dominant, prime shopping centres has created a highly competitive environment. JLL believes that this will drive many domestic investors to start considering alternative opportunities.
…but 2013 will see residential emerge as an institutional investment. Activity in alternatives reached record levels in 2012, with £2.5bn invested in the first nine months, compared with £0.9bn over the same period in 2011. While all the component sectors are set for strong growth in the medium term, 2013 is likely to see lower volumes. The JLL report states: “More significantly, next year will see residential begin to emerge as a serious asset class, with the first deals agreed on large-scale portfolios or developments helped by government guarantees. Overseas investors may be the first movers, particularly if they have exposure to the well-developed residential investment markets in Germany or the US.”
View from the expert
Stephen Down, head of central London investment, Savills: “We expect cross-border property investors to continue to be drawn towards the quoted ‘safe-havens’, such as London offices and prime UK retail, during 2013, which will continue to support the current low prime yields in both sectors. The institutional capital flows will continue to come from the Far and Middle East, in particular. China is a case in point. The recent relaxation by the Chinese Insurance Regulatory Commission on life companies will lead to a significant increase in the weighting of Chinese money into global real estate.”
Offices
• Activity will improve – especially in the second half of the year in central London. The rapidly growing TMT sector will play some role in this, according to the JLL report, but the main driver will be M&A and corporate consolidation. Barely any change in vacancy is forecast in 2013 across the UK apart from in central London and, more specifically, the City. London will also be the exception in terms of new starts on speculative space. Around 4.3m sq ft is set to come online in 2013 in the capital, according to JLL, and a further 1.8m sq ft in 2014. The report adds: “Beyond this, there is nothing under construction, speculatively in London. As the current pipeline is inadequate to meet any upturn in demand, we expect speculative activity to begin again during 2013.” Finally, recovering demand and falling supply in 2013 mean prime rents are likely to show “a more sustained revival”. JLL predicts 4.4% growth in the City and 5.3% in the West End.
• The outlook will remain subdued but improve on 2012 in the regions. Further job stagnations means demand in 2013 is not expected to change radically, although there are large requirements to fulfil in areas including Manchester and Cardiff. The reports states: “Other factors support demand over the longer term, including creeping obsolescence and strong corporate balance sheets, though the immediate recovery will remain fragile, with the risks still on the downside of 2013. Outside the capital, JLL expects only 1.1m sq ft of office commencements and the majority of new equity and finance will focus on prime office buildings in the most liquid markets, such as London and the South East. Prelet-led development will be an option for regional markets, though any progress is likely to be slow in 2013 and rental hotspots will be areas where “healthy local demand combined with tight supply”.
View from the expert
Neil Blake, head of UK and EMEA Research, CBRE: “2013 could be the year when some regional prime office markets start to see signs of life. Next year, if the modest economic recovery that we are experiencing spreads beyond London, and as long as the positive upwards trend that we have started to see in office-based employment in some big regional cities continues, then rental growth should become more widespread. The impact of improving demand on rents in the regional cities will be accentuated by the almost complete absence of recent development. At the other end of the market, secondary regional office rents are likely to slide and market average rents will also continue to fall.”
Retail
• Strong global capital will continue to flow into retail. The UK is second only to the US in terms of all direct retail investment over the past three-and-a-half years, accounting for 14% of all global investment in that period, ahead of Germany with 10%. JLL expects the UK retail market to attract international investment into safe haven markets with strong track records. London will remain a key focus. The report predicts increased international occupier interest in London and stronger regional locations, such as Leeds. The above, though encouraging for the sector, does increase competition for UK retailers.
• London will cement its position as a leading global retail destination. In JLL’s cross-border index, London is the most attractive location for international retailers in Europe for the second year. London has become a test bed market for international retailers – particularly those from the US and China – to test European expansion. This is likely to be an emerging pattern in 2013.
• Reinvestment will become the new development. Total new shopping centre space in 2013 will be around 2m sq ft, up from the estimated 450,000 sq ft in 2012. This is well below the long-term average of 3m sq ft. With few flagship schemes in the pipeline, there will be an increase in redevelopment activity. Land Securities’ Buchanan Street in Glasgow and Stanhope’s Hereford scheme are among the most high-profile in-town redevelopment schemes under way.
• There will be a redefinition of UK retail hierarchy. Sales growth will vary hugely depending on region and retail type. High street, shopping centre and out-of-town locations will feature in the future of retail, but with varying degrees of dominance.
View from the expert
David Atkins, chief executive, Hammerson: “There will continue to be polarisation of retail destinations, with consumers opting for large centres that offer an exceptional day-out experience, or the convenience of retail parks. The high street will need to take its lead from some of the UK’s market towns, which have reinvented themselves as specialist retail destinations. International retailers will continue to place importance on the UK market, and we can expect to see more launches in strong locations. Consumer expenditure will continue to be under pressure, with retailers having to work harder to gain a share of disposable income. Consumers are, however, prepared to spend money on compelling products marketed in the right way.”
Industrial and Logistics
• Sheds could become the new shops. The trend to build to suit is expected to continue in 2013, resulting in an increasing focus among developers to ensure sites are “oven ready”.
• Speculative development will return. The supply of speculative space has fallen by more than 70% from its pre-recession peak to around 8.1m sq ft. The report says: “We believe that 2013 will see the first big box speculative development to start for some four years. We are not predicting a sweeping return on a major scale. Rather, we believe that a few leading developers will ‘push the button’ on a very selective basis in absolutely prime markets.”
• Online and multi-channel retail will drive demand. JLL expects the growth of online retail to continue to affect logistics as both food and non-food retailers look at more dedicated models to service internet sales. Buildings will include hub-and-spoke networks of parcel carriers, warehouses and collection points for click-and-collect services.
View from the expert
Sue Foxley, head of research, Cluttons: “Despite falling occupier confidence, investor interest in industrial assets is steadily growing. We have found that total returns for industrial properties averaged at just over 4% in 2012. However, a supply-demand imbalance is likely to underpin investor interest, particularly in London and strong South East locations. This provides a positive outlook for 2013, with yields for the strongest distribution sheds remaining stable.”
Residential
• Pricing in central London will be flatter in 2013, but will return to stronger growth from 2014. While supply could be higher in some peripheral locations, the number of new homes in London will remain well below the 36,000 estimated to be needed each year. Consequently, JLL predicts price growth of around 2% in the first half of 2013. Towards the end of the year, demand should increase as the global economy hopefully heads for more stable growth. This should result in price growth of 4%.
• International buyers will come from a broader range of backgrounds – but will be more selective.
• Demand for rented accommodation – and rents – will continue to grow. With high deposits required to achieve affordable mortgage rates, many young people have no option except renting. The change has been particularly pronounced in London. With no improvement in mortgage availability expected in the medium term, the rented sector will continue to grow. JLL expects a 5% rent increase in Greater London and 3% elsewhere.
View from the expert
Robin King, director, Move with Us: “Over the next 12 months we also expect to see the highest ever proportion of new-build transactions compared to secondhand properties. This increase is likely to be a result of incentives offered by developers in what is still a challenging lending market.”
Hotels
• London will remain sought after, despite supply growth and a potential Olympic hangover. The report describes the concern over trading performances of London hotels in the aftermath of the Olympics as “misplaced”. It predicts a robust 2013 in the capital.
• It is a different story in the regions. The report describes 2013 as “the year of reckoning” for the majority of regional portfolios after nearly four years of sub-optimal trading. The report reiterates the expectation that this market will not get much better in the short to medium term. Only the strong will survive as, “Those which are starved of the necessary capital expenditure to maintain their product quality will slip further behind and stakeholders face a further deterioration of asset values.”
• There are options for hotels to drive growth. The report suggests renovating out-of-date products and investing in technology to improve channels to market, reduce commission payments to third-party bookers and retain maximum profit.
View from the expert
Russell Kett, chairman, HVS: “London’s hotels should experience strong demand. Buyer interest remains very strong and there may even be some debt available. Outside London is another world. Many UK provincial hotels will struggle through 2013 in need of both customers and investment. Several owners will seek to sell their distressed businesses.”
