IN BRIEF UK COMMERCIAL PROPERTY UPDATE AND OUTLOOK - July 2021 - Gerald Eve
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IN BRIEF
UK COMMERCIAL PROPERTY UPDATE AND OUTLOOK
July 2021
Read more.
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JULY UPDATE
All Property quarterly total return hit 3.9% in
June – the highest since 2014. Industrial was the
driving factor again and is at unprecedented levels
of performance, though retail warehouses are
also posting increasingly positive returns while
shopping centres and the high street showed £12.8bn 42% 7.3% 3.0% 0.9% 4.8%
more meaningful signs of stabilisation. Read more Q2 UK commercial annualised distribution 2021 GDP forecast 2021 CPI forecast 2021 10-yr bond yield 2021 unemployment
property investment warehouse total return forecast rate forecast
for the most recent occupier and investment volume
updates, economics data and property forecasts.
Read more.
UK PROPERTY SEGMENTS UK ECONOMY SPOTLIGHT OUTLOOK C O N TAC T
Industrial on course to break
all records in 2021
All Property quarterly total return increased again in June and, at Office investment performance is still largely unremarkable, Quarterly total return by sector
3.9%, you would need to go back to 2014 to find a stronger three though City returns have been trending upwards in recent Source: MSCI
month period. The total investment volume for Q2 was £12.8bn, months as employees increasingly return to the office workplace. %
which was broadly in line with the 5-year average but had wide Some requirements have restarted but many occupiers are still in the 10
8
sector variations within it. throes of analysing future hybrid working practices and regearing their 6
existing offices. Investment volumes picked up in June and Q2 totalled 4
Industrial investment was £3.8bn in Q2. In isolation that is a strong £4.8bn – a significant increase on a very subdued Q1. The largest deal 2
quarter, but together with the £3.5bn in Q1 and £4.8bn in Q4 2020 in June was £714m for a business park portfolio bought by Brookfield. 0
the current rate of investment is unprecedented and 2021 is set to There was a clutch of other major central London transactions also, all
-2
be a record year. Large distribution warehouses have accounted secured with overseas capital.
-4
-6
for a large proportion of deals, reflecting in part the supply of -8
new developments and funding opportunities. Around a quarter Retail investment picked up to £1.4bn in Q2, albeit from a low base -10
Jun-14
to a third of investments over the last three quarters has been via and it remains the least invested major sector. Brookfield was also
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portfolio deals. The most significant recent transaction was the active in retail, with a recent £330m retail warehouse portfolio deal. All Property Retail Office Industrial
£1.7bn Alaska portfolio of ASDA distribution centres in a sale-and- Retail warehouse quarterly total return continued to trend upwards
leaseback to Blackstone in July. Regionally, Greater London and the to 4.4% in June, driven by yield impact. The other retail subsectors
Quarterly investment by sector
West Midlands have been the most popular. were showing more signs of stabilisation, with total returns in June Source: Propertydata, Gerald Eve
the least negative since 2018. Shopping centre quarterly total return £bn
Industrial quarterly total return was 7.7% in June, which is essentially was -0.5%, compared with -11.1% at the height of the pandemic. 20
the highest on record. The stellar performers continue to be Equally high street return was -0.8%, compared with -10.1% last May. 18
distribution warehouses and London multi-let, which have benefited 16
14
from both strong rental growth and sharp inward yield shift. In the
£12.8bn 42%
12
three months to June, distribution warehouse total return was 9.0%. 10
At an annualised rate, that is an astonishing 41% return. 8
Q2 UK commercial property annualised distribution 6
investment volume warehouse total return 4
2
0
Q1 2015
Q2 2015
Q3 2015
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Industrial Office Retail Leisure and Alternatives
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UK PROPERT Y SEGMENTS UK ECONOMY SPOTLIGHT OUTLOOK C O N TAC T
Segments
12-month return to June 2021
Source: MSCI
%
30
20
10
0
-10
-20
-30
London UK distr All SE ROUK Supermarket All Lon/SE Retail City All All Midtown & ROUK ROUK SE Leisure London ROUK SE Shopping
multi-let w’house Industrial multi-let multi-let Property office parks warehouse office Retail Office WE office office parks standard office office high street high street high street centres
industrial industrial
Income return Rental growth Yield impact Total return
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UK PROPERTY SEGMENTS UK ECONOMY SPOTLIGHT OUTLOOK C O N TAC T
UK economy
UK GDP came in below expectations in May and was only
0.8% higher than in April. This nevertheless nudged overall
CPI inflation surprised on the upside at 2.5% in June, the highest
since August 2018. However, a temporary increase was expected 7.3% 0.9%
output to only 3.1% below the pre-pandemic level. Hospitality on the back of the surge in oil prices to over $73 a barrel in June,
2021 GDP forecast 2021 10-yr bond yield forecast
sector activity rebounded well, boosted by a full month of up from $23 a barrel in April 2020. Other contributing factors include
open outdoor venues and 15 days for indoor counterparts. the price of second hand cars, restaurants, and hotels. Oxford
However, momentum stalled in non-consumer facing parts
of the services sector, such as administrative and support
Economics continues to take the view that UK inflation remains
contained and will peak at around 3% at the end of 2021 before falling 3.0% 4.8%
services. Microchip shortages also disrupted car production. back next year as these transitory effects fall out of the figures. 2021 CPI forecast 2021 unemployment rate forecast
Oxford Economics now predicts a Q2 growth rate of 4.8% The monthly monitor
from Q1, revised down from 5.5%. However, this less positive Source: Bank of England, European Commission, IMF, ONS Two-year trend Latest figure
near term outlook has been described as a ‘blip’ and the GDP annual growth 24.5%
recovery is forecast to regain momentum in Q3 after most
Unemployment rate 4.8%
remaining restrictions were lifted on 19th of July. Nightclubs
Consumer confidence -5.8
and large events have reopened, along with the relaxation
of social distancing requirements that reduced the capacity Retail sales growth 9.8%
of many other venues. Retail sales % online 26.1%
Manf output growth 27.7%
Retail spending figures have been choppy as other avenues
to spend have opened up, with falls in spending on food in Brent crude (USD/bbl) 73.07
May and household goods and clothing in June. Online retail Gold (USD/oz) 1,833
spending fell again to 26.1% of the total in June, but this and FTSE100 6,844
spending overall are still well above pre-pandemic values. CPI inflation 2.5%
Consumer confidence indicators in June remained similar to
10-year bond yield 0.8%
before the pandemic. There have been wide variations in
EUR/GBP 1.17
the impact of the lockdowns on households but many are in
a strong position to support the recovery. USD/GBP 1.38
Two-year trend Latest figure
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UK PROPERTY SEGMENTS UK ECONOMY SPOTLIGHT OUTLOOK C O N TAC T
Spotlight on… UK logistics
Record high take-up in Q2 Supply at an all-time low Rolling annual take-up by occupier sector
Source: Gerald Eve
Occupier take-up was 22.3 million sq ft in Q2 – a third higher than The overall availability rate fell for the third consecutive quarter Million sq ft
80
in Q1 and over two-thirds above the 5-year quarterly average. This in Q2 to 5.2%, the lowest since our records began in 2006. The 70
record-breaking quarter brings take-up over the last 12 months to availability rate for new or modern stock fell sharply to 2.2% in 60
an incredible 71.1 m sq ft. The sea-change in consumer behaviour Q2, down from 2.8% in Q1 and 4.5% a year earlier. The availability 50
accelerated by covid lockdowns continues to put pressure on of up-and-built new or refurbished stock is now at a record low 40
logistics and online retailer supply chains to meet intense demand in nearly all UK markets, especially in London and the South East, 30
for home delivery. These occupiers have been decisive in expanding and prime locations in the Midlands. 20
10
their logistics property footprints by taking up-and-built space for
0
immediate occupation and signing pre-lets for long term growth plans.
2017 Q1
2017 Q2
2017 Q3
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Other / unknown / services / data centres Other retail Manufacturing
Logistics and dedicated internet retailers 5 year annual average
Amazon accounted for 38% of Q2 demand
Amazon let or received planning permission on over 8m sq ft of
Rental growth forecasts upgraded
Prime headline rents increased in over half of our 53 Gerald Eve
5.2% 71.1m sq ft
UK availability rate annual logistics take-up, Q2 2021
new accommodation in Q2. This includes planning permission on centres in Q2, aggregating to 2.2% UK quarterly rental growth and
2m sq ft buildings in Tees Valley, Wakefield and Basingstoke, and 4.3% for the first half of 2021. Since the onset of the pandemic in
the take up of speculative buildings such as Wakefield 515 and MP411
in Lutterworth. It also committed to several smaller facilities closer
Q2 2020, UK prime rents have grown 6.2%. Such intense occupier
market conditions have meant that we have upgraded our national 2.2%
to London in Q2, taking buildings in Orpington, Kent and Harlow. prime logistics rental growth forecasts. The base case outlook for UK quarterly prime headline rental
growth, Q2 2021
prime logistics headline rents is for an above-inflation average annual
growth of 4.3% per year over the next three years. Rental growth is
forecast to be frontloaded in 2021, increasing by 7% while market
conditions are the most acute.
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UK PROPERTY SEGMENTS UK ECONOMY SPOTLIGHT OUTLOOK C O N TAC T
Outlook
All Property total return is forecast to return to a positive and be
Total return and components by sector
10.9% in 2021, slipping back to 6.9% in 2022. This will be driven in Source: Gerald Eve, MSCI
the short term by a surge in industrial rents and yield tightening,
and as retail and leisure pricing stabilise and contribute positively Retail Industrial
again in some cases in H2 2021. % %
15 25
0.3% 8.0% 10.1%
10
There will be sustained underlying strength in the industrial market, 5
20
17.9% 5.8% 6.0%
not only in London and South East multi-let, but also wider UK 0 15
distribution warehouses. The current late cycle surge in investment -5
activity and pricing will boost total return in 2021. However, this very -10 10
keen pricing going into more uncertain economic conditions in 2022 -15
5
suggest this rate of return will not be maintained. -20
-25 0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2015 2016 2017 2018 2019 2020 2021 2022 2023
Headline office rents in the regions are expected to deteriorate
more rapidly in 2021 as tenant-controlled space continues to
Office All Property
increase. Thus some further yield softening in the short term is
% %
expected – particularly for secondary assets with short income 20 15
that pose greater operational and ESG issues. 10.9% 6.9% 7.3%
15
10
2.8% 6.8% 6.9%
10
Retail should experience some further but smaller falls in rents and 5
5
more moderate outward yield shift in 2021. A non-negative annual
0
total return in 2021 driven by retail warehouses will be the first since 0
2017. By 2022 total return should increase to be relatively competitive -5
-5
against other sectors, boosted by a large income return component.
-10 -10
2015 2016 2017 2018 2019 2020 2021 2022 2023 2015 2016 2017 2018 2019 2020 2021 2022 2023
Income return Rental growth Yield impact Total return
geraldeve.com/services/researchUK PROPERT Y SEGMENTS UK ECONOMY SPOTLIG HT OUTLOOK CO NTAC T
Contact
Research Further Insight
STEVE SHARMAN BEN CLARKE OLIVER AL-REHANI
Partner Partner Senior Research Analyst
BRIEFING NOTE BRIEFING NOTE
June 2021 June 2021
SUSTAINABLE RETROFIT IN THE WESTMINSTER’S ENVIRONMENT
INDUSTRIAL SECTOR SUPPLEMENTARY PLANNING DOCUMENT
ssharman@geraldeve.com bclarke@geraldeve.com oal-rehani@geraldeve.com
Cordelia Batt James Wickham
Senior Surveyor Partner
Tel. +44 (0)20 3486 3613 Tel. +44 (0)20 333 6353
cbatt@geraldeve.com jwickham@geraldeve.com
Tel. +44 (0)20 7333 6271 Tel. +44 (0)20 7333 6288 Tel. +44 (0)20 7518 7255 James Yarham Justin Quiney Westminster City Council has released its draft Environment
Senior Planning Consultant
Senior Surveyor Challenge
Tel. +44 (0)20 7333 6287
Supplementary Planning Document for consultation. This follows the
Tel. +44 (0)20 3486 3718 adoption of its City Plan in April 2021. The draft SPD is a wide-ranging
jquiney@geraldeve.com
jyarham@geraldeve.com Climate change is one of the biggest challenges facing humanity. document, providing much of the necessary detail to support the
With the built environment accounting for around 40% of the world’s formal policies within the new plan.
carbon footprint, the real estate industry has a key role to play in
the reduction of emissions. This is something that the industrial Westminster City Council has released its draft Environment Supplementary
sector is devoting significant energy and resource into doing. Planning Document for consultation. This follows the adoption of its City Plan
in April 2021. The draft SPD is a wide-ranging document, providing much of the
In the last decade sustainability has moved to the forefront of the industrial necessary detail to support the formal policies within the new plan. It will form an
agenda, with occupiers demanding sustainable space, investors targeting important additional layer of guidance for developers and occupiers considering
sustainable assets and developers building high specification units that align development or changes of use in Westminster, effectively restating and replacing
with the strictest environmental standards. much of the detailed policy that was previously contained within Part 2 of the
old Unitary Development Plan, which finally ceased to apply on adoption of the
Capital Markets Agency Valuation
However, the opportunity to occupy, purchase or build new industrial buildings new Plan. The draft guidance also specifically seeks to give “more prominence and
is clearly limited, therefore there is increasing focus on existing stock. Bearing in weight to environment issues” than the current planning framework does and is
mind 87% of buildings that will be in existence in 2050 have already been built, described as a “game changer” on some issues.
improving their sustainability is key if the UK is to meet its net zero commitment
by then. Further still, with stricter MEES regulations due to come into force in
April 2023 building owners must act now or be faced with unlettable assets.
JOHN RODGERS MARK TROWELL RICHARD MOIR geraldeve.com geraldeve.com
Prime Logistics Sustainable Retrofit Westminster SDP Prime Logistics Bulletin
Partner Partner Partner Q2 2021 June 2021 June 2021 Q1 2021
jrodgers@geraldeve.com mtrowell@geraldeve.com rmoir@geraldeve.com
Tel. +44 (0)20 3486 3467 Tel. +44 (0)20 7333 6323 Tel. +44 (0)20 7333 6281
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analysis of our award-winning research team. With a particular focus
on investment, London offices and industrial, our researchers work Prime Logistics Report
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