IN BRIEF UK COMMERCIAL PROPERTY UPDATE AND OUTLOOK June 2021 - geraldeve.comservices/research - Gerald Eve
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IN BRIEF
UK COMMERCIAL PROPERTY UPDATE AND OUTLOOK
June 2021
Read more.
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JUNE UPDATE
Strength in Industrial drove All Property to the
highest rolling quarterly return in three and
a half years and all the signs are for a strong
economic bounceback in Q2. But the extended
eviction moratorium to March 2022 points to
more pain for landlords and a more subdued March 2022 34% 7.7% 1.5% 1.0% 4.8%
Leisure investment recovery. Read more for the extended eviction annualised distribution 2021 GDP forecast 2021 CPI forecast 2021 10-yr bond yield 2021 unemployment
moratorium warehouse total return forecast rate forecast
most recent occupier and investment updates,
economics data and property forecasts.
Read more.
U K PRO PERT Y SEGMENTS UK ECONOMY SPOTLIG HT OUTLOOK CONTAC T
Extended moratorium points to
a more subdued Leisure recovery
All Property quarterly total return continues to trend upwards and in Shopping centres returns might still be negative, and capital values now Capital values over the pandemic by sector
May reached 3.13% - the highest since December 2017. Again, at the 32% below pre-pandemic levels, but there are signs of bottoming out. Source: MSCI
aggregate level this was mainly driven by yield impact and income Rolling quarterly rental growth and total return were -1.4% and -2.23% Capital value index, Feb 2020 = 100 Cumulative change %
return, while aggregate rental growth remained just above zero. in May, respectively, which was the least negative month for both since 120
before the pandemic. 17%
The key positive driving force for returns is of course from industrial.
UK-wide distribution warehouse quarterly total return pushed ahead Leisure assets posted a positive but relatively modest quarterly total 110
11%
of even London multi-let to reach 7.59% in May, which is an annualised return of 1.56% in May, despite the economy reopening and given that
return of 34%. Occupier demand is strong and varied, availability is leisure capital values are 22% cheaper than pre-pandemic. We anticipate
at an all-time low and rents are growing strongly. Investor demand a subdued recovery, linked to increased risks around unpaid rent 100
is fierce, and the distribution warehouse equivalent yield fell to a record debts made more difficult by the eviction moratorium being recently
low 5.19% in May. The biggest recent transaction was Blackstone’s extended to March 2022. Business rates support will not be extended in -7%
acquisition of the Albion portfolio of 31 assets for £283m in May. parallel, further increasing the likelihood of unactionable rent defaults. 90
-12%
Retail quarterly total return increased again in May to 1.61% and Offices continue to be relatively uneventful in overall performance -17%
widened the gap with offices, which again returned only 0.33%. Retail terms. Prime yields have broadly held in 2021, but 7% has been eroded
80
warehouses continued to be the positive driving force, with a quarterly from capital values as rents get chipped away outside of the central -22%
total return of 3.48%, which was its highest since October 2014. London markets. However, investor activity is starting to pick up in
readiness for the full societal reopening and June investment volumes
High street quarterly total return was edging closer to zero in May are on course to achieve the highest monthly level in 2021, with £950m
70
-32%
and recorded -1.9%. Rents for the subsector still fell more than 4% transacted as of the 23rd.
over the last three months, making this the worst retail subsegment
in this regard. The overall improvement in returns in May was driven 60
March 2022 34%
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by London high street, where yields moved in 10bps between
April and May to 4.69%, far below the rest of the UK where they extended eviction annualised distribution Retail Shopping centres Retail Warehouse Office
continued to drift slightly. moratorium warehouse total return Industrial Multi-let Leisure
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UK PROPERT Y S EGMENTS UK ECONOMY SPOTLIG HT OUTLOOK CONTAC T
Segments
12-month return to May 2021
Source: MSCI
%
30
20
10
0
-10
-20
-30
London UK distr All SE ROUK Supermarket All Lon/SE Retail City Midtown & ROUK All ROUK All SE Leisure London ROUK SE Shopping
multi-let w’house Industrial multi-let multi-let Property office parks warehouse office WE office office parks Office standard office Retail office high street high street high street centres
industrial industrial
Income return Rental growth Yield impact Total return
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UK PROPERT Y SEGMENTS U K ECO N OMY SPOTLIG HT OUTLOOK CONTAC T
UK economy
UK GDP increased by 2.3% month-on-month in April, pushing CPI inflation increased to 2.1% in May and the recent rises in the
economic activity to only 3.7% below the pre-pandemic level.
Non-essential retail and outdoor hospitality reopened on 12th
UK (and notably in the US) has had much coverage of late over
fears that increased price expectations may get entrenched.
7.7% 1.0%
2021 GDP forecast 2021 10-yr bond yield forecast
April and, unsurprisingly, it was these sectors that contributed However, Oxford Economics continues to take the view that UK
most to the extra economic growth. However, hospitality activity inflation remains contained. Rising fuel and energy prices, the
was still operating at more than 40% below its previous capacity.
Consumer confidence is on aggregate back up to levels from
reversal of the VAT cut for hospitality and strong base effects will
fall back out of the figures. The recent strength of sterling, up 1.5% 4.8%
against both the euro and the US dollar, will also act as a drag. 2021 CPI forecast 2021 unemployment rate forecast
before the pandemic and surveys of households that have
accumulated excess savings suggest an increasingly bullish
attitude towards spending them. The proportion of retail The monthly monitor
spend online fell again to 27.3% in May, but this is still well Source: Bank of England, European Commission, IMF, ONS Two-year trend Latest figure
above the 20% in early 2020. GDP annual growth 27.6%
Unemployment rate 4.7%
May and June should see further strong rises in GDP following
Consumer confidence -5.8
the reopening of indoor hospitality in England on 17th May.
Consequently Oxford Economics expects GDP to rise by Retail sales growth 24.6%
5.5% quarter-on-quarter in Q2. The impact of the four week Retail sales % online 27.3%
delay to the final stage of reopening in England should be Manf output growth 39.7%
only moderate and in fact the recent stronger activity and Brent crude (USD/bbl) 68.04
sentiment data has given cause for Oxford Economics to
Gold (USD/oz) 1,833
increase its forecast of GDP growth for 2021 to 7.7%, up from
7.5% last month. FTSE100 7,018
CPI inflation 2.1%
The latest ILO unemployment figure ticked down again to 10-year bond yield 0.9%
4.7% in April and the risk of a large increase when the Job
EUR/GBP 1.16
Retention Scheme is wound down in September looks unlikely.
Unemployment has probably already peaked at just over one USD/GBP 1.42
percentage point above its pre-pandemic level. Two-year trend Latest figure
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UK PROPERT Y SEGMENTS UK ECONOMY S P OTLIG HT OUTLOOK CONTAC T
Spotlight on…
Modern requirements and the reshaped ‘prime’ logistics
Blackburn
Kingston upon Hull
Occupier demand for UK logistics property is at an all-time high and Halifax
Wakefield Pontefract
Goole
stems from a range of sectors. Accelerated shifts in online shopping Skelmersdale Bolton
Bury Huddersfield
Barnsley
Scunthorpe
patterns have put pressure on logistics and retailer supply chains;
Oldham
Grimsby
Wigan
Bootle Manchester Doncaster
manufacturer demand has increased in response to new Brexit trading Liverpool
St Helens
Rotherham
arrangements; and data centres along with emerging sectors – such Warrington Stockport Sheffield
Gainsborough
Birkenhead
Widnes
as sustainable energy production and even film and TV production Runcorn
Macclesfield
Buxton
companies – are all vying for industrial space. The most in-demand Queensferry
Northwich
Chesterfield
Lincoln
buildings in Q2 were let following rental best bids from a variety of Mold Chester Congleton Mansfield
Matlock
Ruthin M1 Newark-on-Trent
would-be tenants. As a result, void periods are short, availability is at an Wrexham Nantwich Stoke-on-Trent
Ashbourne Sleaford
all-time low and prime rents are growing strongly. Llangollen Whitchurch
Boston
Nottingham Grantham
Stone
Derby
Developers have responded with speculative schemes and land is Oswestry
Uttoxeter
Burton upon Trent
being readied through planning permission and infrastructure works.
Stafford Loughborough
Spalding
Shrewsbury
A1 King's Lynn
Rugeley
However, appropriate serviced land is typically both expensive
Telford
Cannock Lichfield Wisbech Norwich
Leicester Stamford Swaffham Great Yarmouth
and in short supply, especially in the traditional ‘prime’ locations.
Tamworth Oakham
Brownhills Downham Market
Wolverhampton
Consequently the most acquisitive occupiers have widened their
Hinckley Peterborough
Dudley Lowestoft
Bridgnorth Nuneaton
search to less established logistics markets. These sites can still often Birmingham
Corby
meet key modern occupational requirements, such as sufficient
Kettering Thetford
Kidderminster Rugby Ely
Coventry Huntingdon
power for sophisticated automated facilities, access to a diverse and Bromsgrove Warwick
Royal Leamington Spa
A14 Newmarket
skilled workforce and the best-in-class ESG building credentials. Llandrindod Wells Leominster
Worcester
Northampton
Cambridge
Bury St Edmunds
Stratford-upon-Avon Bedford
Builth Wells Daventry
Suitable land is more readily available (and cheaper) in locations on Evesham
M1 Ipswich
the outskirts of traditional prime locations, and thus development
Hereford Banbury
M11
M50 Milton Keynes Colchester
appraisals can be more palatable. This outward overspill has been Brecon
Ross-on-Wye Stow-on-the Wold M40 Luton Stevenage
Stansted
evident for several years but certain regions in the South East
Llandeilo Gloucester Cheltenham
Bishop's Stortford Clacton-on-Sea
Abergavenny Aylesbury
St Clears Hertford
have been given a significant boost since the pandemic, including Monmouth Oxford St Albans
Hatfield M25
Suffolk and Oxfordshire. Several markets around the traditionally Llanelli M4
Neath
Hemel Hempstead
Watford
Enfield Chelmsford
recognised Golden Triangle in the Midlands have had a marked
High Wycombe
Cwmbran M5 Cirencester Brentwood
Swansea
Southend-on-Sea
increase in demand. Newport Swindon
Basildon
Maidenhead London West Thurrock Tilbury
Golden triangle Demand ripple effect
Cardiff
Bristol Chippenham
Reading
Heathrow
Staines Dartford
Sheerness Whitstable Margate
M4 Bracknell Chatham
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UK PROPERT Y SEGMENTS UK ECONOMY SPOTLIG HT O UTLOO K CONTAC T
Outlook
All Property total return is forecast to return to a positive and be Total return and components by sector
Source: Gerald Eve, MSCI
10.4% in 2021, slipping back to 6.8% in 2022. This will be driven in
the short term by a surge in industrial rents and yield tightening,
Retail Industrial
and as retail and leisure pricing stabilise and contribute positively
% %
again in some cases in H2 2021. 15 25
0.3% 8.0% 10.1%
10
20
There will be sustained underlying strength in the industrial market, 5 16.8% 5.7% 5.9%
not only in London and the South East multi-let, but also wider UK 0 15
distribution warehouses. The current late cycle surge in investment -5
10
activity and pricing will boost total return in 2021. However, this very -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
increase. Thus some further yield softening in the short term is Office All Property
expected – particularly for secondary assets with short income that % %
20 15
pose greater operational and ESG issues. 10.4% 6.8% 7.2%
15
10
2.8% 6.8% 6.9%
10
Retail should experience some further but smaller fall in rents and 5
more moderate outward yield shift in 2021. A non-negative annual 5
total return in 2021 driven by retail warehouses will be the first since 0
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 Senior Associate 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
Senior Surveyor
Tel. +44 (0)20 3486 3718
jyarham@geraldeve.com
Challenge
Climate change is one of the biggest challenges facing humanity.
With the built environment accounting for around 40% of the world’s
carbon footprint, the real estate industry has a key role to play in
the reduction of emissions. This is something that the industrial
Justin Quiney
Senior Planning Consultant
Tel. +44 (0)20 7333 6287
jquiney@geraldeve.com
Westminster City Council has released its draft Environment
Supplementary 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 necessary detail to support the
formal policies within the new plan.
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
Capital Markets Agency Valuation
old Unitary Development Plan, which finally ceased to apply on adoption of the
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
Sustainable Retrofit Westminster SDP Prime Logistics Bulletin Prime Logistics Report
Partner Partner Partner June 2021 June 2021 Q1 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
Our advice and recommendations are underpinned by the in-depth
analysis of our award-winning research team. With a particular focus
on investment, London offices and industrial, our researchers work Life Sciences Gerald Eve Sustainability Industrial Revolution Multi-let Insight Series
Q1 2021 July 2020 July 2020 Summer 2020
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