Q1 2018 - UK | Research & Forecast Report - Colliers International
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UK | Research & Forecast Report Q1 2018
All Property Forecasts 3 Economic Outlook 4 Investment Market 5 Retail 6 Standard Shops 6 Shopping Centres 6 Retail Warehouses 7 Supermarkets 7 Offices 8 Central London 8 South Eastern Offices 9 Rest of UK Offices 9 Industrial 10 Standard Industrial and Distribution Warehouses 10
All Property Forecasts Total Return by Sector
20
Retail Office Industrial All Property
Colliers forecasts total commercial property returns of 6.1% in 2018, down
from 10.2% in 2017, comprising 1.2% capital growth and 4.9% income return.
At 5.6%, all-property equivalent yields are expected to remain unchanged
against 2017 as investment demand remains steady. Nevertheless, total 15
returns will slow to 4.9% in 2019 as yields soften by less than 10 bps, capital
growth flat lines and income becomes the main component of returns at
4.9%. This flat projection, though, belies high variability across the main
commercial sectors. 10
Industrial is expected to remain the star performer in 2018, with all-industrial
yields forecast to move in by 24bps. Total returns are predicted to reach
12.5%, comprising capital growth of 7.4%, income return of 4.8% and a 0.3%
5
residual. We expect double-digit total return growth for standard industrials
across all regions, led by London at 14.6%. Total returns for distribution
warehouses are forecast to experience growth of 10.8% this year before
slowing to 4.6% in 2019. Despite ongoing Brexit uncertainty and potential
0
trade wars, manufacturing and other business surveys signal ongoing 2017 2018f 2019f
strength across the sector. Source: Colliers International, MSCI
The office and retail sectors are forecast to see much weaker returns this
year. Offices are anticipated to yield a total return of 4.7% in 2018, comprising ERV Growth 2018-2022 % pa
0.5% capital growth and 4.2% income return. Offices outside of Central
Standard Industrials
London will see much higher returns, with ‘Rest of UK’ forecast to record total
Standard Offices
returns of 8.6%, closely followed by Rest of London at 7.6% and the South Rest of London
East at 7.5%. In contrast to Central London, yields in these regions will harden Distrib Ware
slightly, driving modest capital growth. Demand for grade A space is set to Standard Offices
remain strong and will support a continuation of overseas appetite for trophy South East
Standard Offices
assets in London and prime assets further afield in the UK, especially Rest of UK
regional CBDs. Standard Retails
Standard Offices
The retail sector will struggle in 2018 with weak consumer confidence and West End
increased costs, especially business rates and the National Living Wage Leisure
impacting and adding to financial strains for occupiers. Total returns are
Office Parks
expected at 3.5%. Income returns of 5.3% will be compromised by negative
capital growth, down by 1.7%. Shopping centres will fare particularly poorly, Retail Warehouses
with a total return of -1%, as yields move out and capital values begin to fall. Standard Offices
City of London
In contrast, Central London standard shops will continue to outperform the Supermarkets
sector as a whole at 6.2% total return. Occupiers will be supported by rising
Shopping Centres
overseas visitor numbers, the part-pedestrianisation of Oxford Street and
the opening of the Elizabeth line. Furthermore, positive real wage growth is 0% 1% 2% 3% 4%
likely to return in mid-2018 and support a recovery in consumer confidence, Source: Colliers International
bringing some respite for retailers who are struggling.
Total Return 2018-2022 % pa
Standard Industrials
Distribution Warehouses
Standard Offices
Rest of UK
Standard Offices
Rest of London
Standard Offices
All Property Summary Forecasts South East
Supermarkets
ANNUALISED Leisure
DEC-17 DEC-18 DEC-19
2018 - 2022
Standard Retails
ERV Growth (% pa) 2.3 0.9 1.0 1.7
Retail Warehouses
Equivalent Yield (% eop) 5.7 5.6 5.7 5.8 (2022) Office Parks
Standard Offices
City of London
Capital Growth (% pa) 5.2 1.2 0.0 0.7 Standard
Offices West End
Total Return (% pa) 10.2 6.1 4.9 5.7 Shopping Centres
0% 5% 10% 15%
Source: Colliers International, MSCI Source: Colliers International
Colliers International | Q1 2018 | REIF | Research & Forecast Report 3
Economic Outlook economic activity recovered in the following months, suggesting that
we will see more positive numbers in April. Business confidence
data from the Institute of Chartered Accountants in England and
Wales (ICAEW) suggests that sentiment improved slightly at the
Economic growth slowed to 0.4% q/q in Q4 17, down from start of 2018, but remained negative overall, with the index rising
0.5% q/q in Q3 17, according to data from the ONS. The service from -3.4 to -1.0. Part of the negative sentiment was attributed
sector remained the main source of growth, expanding 0.6% q/q to November’s base rate rise, as well as to ongoing political
overall. Within services, the transport, storage and communication uncertainty.
sub-sector performed particularly well. Encouragingly,
industrial production increased by 0.5% q/q, driven by a rise in The pound appreciated against the dollar by over 8% since the Bank of
manufacturing output. The construction sector recorded negative England raised its base rate at the start of November and is currently
growth for a third successive quarter and continues to skirt with trading at £1/$1.41 at the time of writing. With at least one more rate
recession, with latest survey evidence pointing to ongoing struggles rise expected this year, the pound is likely to strengthen further in
within the sector in Q1 2018. The construction PMI fell to 47 in 2018. Oxford Economics predicts a rise to £1/$1.46 by the end of the
March, a level associated with contraction, despite a marginally year. In response, annual consumer price inflation has already fallen
expansionary level of 51.4 in February. Anecdotal evidence to 2.7% in February, down from 3.0% in January and the lowest since
suggests that political uncertainty and fragile client confidence last July. Signs of a return to positive real wage growth in the coming
acted as barriers, with snow-related disruption also a key factor months are more apparent given falling inflation, but a tightening
behind the bad performance in March. Meanwhile, the expenditure labour market is also finally starting to exert upward pressure on
components of GDP highlighted that household spending growth nominal earnings. Latest ONS data shows that weekly earnings
remained very subdued at 0.3% q/q, while growth in government rose by 2.8% in January, slightly below January’s inflation rate
spending accelerated to 0.6% q/q. Business investment was flat of 3.0%. Real wage growth is imminent and should begin to
and net trade continued to decline. support consumers.
Weak performance in Q1 may prove transient given snow-related Much of this and next year’s economic performance will depend
disruptions. Encouragingly, when a similar weather-related event on the extent to which real wage growth will boost household
caused the PMI to fall in January 2010 and December 2010, spending. Forecasts from Capital Economics and JP Morgan are in
4 Research & Forecast Report | REIF | Q1 2018 | Colliers Internationalline with our view that private consumption should hold up reasonably
well this year, with GDP growth reaching 2%. The Office for Budget
Responsibility remains more cautious, if not pessimistic, about the UK Selected Rates
economic outlook and predicts GDP growth to slow to 1.5% this year Property-Gilt Spread IPD Equivalent Yield 10Y Gilt Base rate
before weakening further to 1.3% in 2019/2020. GDP growth is then
set to stabilise at 1.5% in 2022. Oxford Economics shares our optimism 9%
about the longer-term trend of the UK economy and predicts growth to
8%
converge to around 1.9% in 2020.
7%
6%
Investment Market 5%
4%
Total trading volumes in 2017 exceeded £65bn, up by more than a 3%
quarter from £52bn in 2016. Industrial was the stand-out performer in 2%
terms of activity growth. Investment volumes in this sector rose by more
than 80% between 2016 and 2017 to break the £10bn mark for the first 1%
time since the data series began in 2000. In terms of market share, 0%
industrial accounted for 17% of all investment activity. The office sector
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
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Dec-18
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Dec-20
Dec-21
Dec-22
remained the most sought after, with total trading volumes reaching
£24bn – a 34% increase from £18bn in 2016 and accounting for 37%
Source: Colliers International, IPD, Haver Analytics and Oxford Economics
of all investment. The top three deals accounted for a tenth of all office
investment (there was a total of 895 deals) and included ‘The Walkie Investment volumes (£ billions)
Talkie’ and ‘The Cheesegrater’. These assets were purchased by Hong
Kong-based Lee Kum Kee and CC Land for £1.3bn (IY 3.5%) and £1.2bn 10.0 2018* 2017
(IY 3.4%), respectively. Notable deals outside of London included the
purchase of Brindleyplace in Birmingham for £265mn (IY 6%) by HSBC
and No 1 Spinningfields in Manchester, bought by Schroder REIM for 7.5
£200mn (IY 5%). In contrast, unit shops, shopping centres and retail
warehouses all saw their shares decline. The share of retail fell from
29% in 2016 to 18% last year, with trading volumes down to £11.5bn. 5.0
The retail sector is forecast to remain under pressure this year and
was off to a notably slow start. Alternative sectors accounted for 28%
of all activity. 2.5
Overseas investors accounted for almost half (49.2%) of all purchases
in 2017, representing a total value of £32bn. Investors from the Far
East made purchases worth £13bn, with the US accounting for £5.7bn. 0.0
J F M A M J J A S O N D
Interestingly, while Far Eastern investors were major net buyers last
year (£11bn), US investors were net sellers (- £4.4bn). US investors Source: Property Data Ltd
have long been net buyers of UK commercial property, with £15bn in * Preliminary data
net investment between 2005 and 2014.
Total trading volumes in 2017 (£bn)
Trading volumes in January/February totalled £8.2bn, a marginal
increase over the £7.7bn transacted in the same period last year. Office Unit Shop Shop Centre Ret Ware
Preliminary transaction volumes for March suggests that Q1 2018 Industrail Leisure Alt / Mixed
may prove to be the weakest quarter since Q3 2016 (immediate
post referendum) hence Q1 2018 may prove weaker than Q1 2017.
Nevertheless, average yields continued to harden in February, according
to the MSCI monthly index. Yield compression in the last two quarters
amounts to 16bps. The number of sub-4% deals is on the rise, with 16.4
most of these low-yielding properties located in London. The highlight
was the purchase of Riverbank House, Swan Lane by Zeno Capital Ltd
24.2
acquired for £400m (3.9% IY), but sub 4% deals were also concluded
for a retail unit in Edinburgh on Princes Street (£17.5m at 3.7% IY) and
an industrial park in Esher (£14.1m at 3.7% IY). Manchester also saw £65.5 bn
an office change hands on Fountain Street for £22.5m at 4.2% IY. The
5.7
weight of capital targeting the UK remains substantial.
11.00 3.5
1.9
2.8
Source: Property Data
Colliers International | Q1 2018 | REIF | Research & Forecast Report 5Retail
Retail Insolvencies
Standard Shops
Companies Failing (LHS) Stores Affected (RHS)
Household spending growth remained sluggish at the beginning of Companies Stores
2018, with retail sales rising by just 1.5% y/y in both January and 60 7,000
February. Although this is the highest growth rate since last August,
50 6,000
it remains well below the average growth rate of 4.8% y/y achieved
in 2016. Food stores continued to record negative sales growth. 5,000
40
Store sales, in general, fell -0.1% y/y in February, while non-store
4,000
retailing rose by 12% y/y. Structural change remains an explanatory 30
byword for the challenging high street trading environment. This 3,000
has been further aggravated by post-referendum inflation, driven 20
2,000
by devalued sterling. The impacts have been rising operator costs
and rising store prices that have undermined sales in a setting of 10 1,000
diminished household disposable income. As noted above, there are
0 0
signs that these pressures may be about to ease. 08
7
9
10
11
12
13
14
15
16
M 18
20
17
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20
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20
20
20
20
20
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20
20
20
20
(e 2
At 2.5% y/y, average store prices increased in February 2018 at the
Source: Centre for Retail Research
slowest pace since June 2017, suggesting that the inflationary effects
of sterling devaluation are passing. Operator costs may begin to fall at
the same time that household disposable income recovers. This should
begin to support operators UK wide for the remainder of 2018, but also High Street Vacancy Rates (Excl. London)
over the forecast horizon. In London, this boost will be supplemented
by the Elizabeth line opening and part-pedestrianisation of Oxford Street Prime Units Prime Floorspace
later this year, both of which are likely to result in higher customer Secondary Units Secondary Floorspace
25%
footfall and spending.
Following the trend of recent years, Central London shops will drive 20%
rental growth on UK high streets, although this growth will slow to
a 3.5% pa rate by the end of 2018, before easing further to 2.3% by 15%
the end of 2019. London’s performance contrasts with 2018 forecasts
10%
for the Rest of the South East & Eastern (-0.5%) and Rest of UK
(-2.5%). Rest of London is forecast to show no growth. Despite some
5%
reasons for optimism, 2018 was off to a challenging start to the year
for retailers. Maplin and Toys ‘R’ Us UK went into administration at the 0%
end of February. New Look will close 60 stores as part of a rescue deal
Apr-11
Aug-11
Dec-11
Aug-14
Apr-15
Aug-15
Dec-12
Dec-14
Aug-17
Dec-16
Apr-14
Dec-15
Aug-16
Dec-13
Apr-12
Apr-16
Aug-12
Apr-13
Apr-17
Aug-13
and Genus UK is seeking a CVA that would allow it to slash rents. The
national minimum and living wages (£3bn per annum increase in costs)
and rising business rates will keep the pressure on. Source: Colliers International
Note: Vacancy rate = Empty space as % of total space and empty units
as % of total units
Shopping Centres
Investment volumes weakened markedly in 2017 and stood at just
£1.9bn, down by around 40% from £3.1bn in 2016, highlighting that Average Retail Rental Growth Forecasts (2018-22)
investment appetite for shopping centres has waned considerably. No
deals worth more than £200mn were recorded in 2017, compared to 4%
four large deals in 2016. Notable transactions in 2017 included Invesco’s
£150mn acquisition of a 50% stake in the Southside SC (4.4% IY) and 3%
Frogmore’s purchase of Stratford SC for £142mn (5.5% IY).
2%
Retail Forecast Summary
ANNUALISED 1%
DEC-17 DEC-18 DEC-19
2018-2022
ERV Growth (% pa) 1.8 0.7 1.2 1.5 0%
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Equivalent Yield (% eop) 5.5 5.6 5.7 5.8 (2022)
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Capital Growth (% pa) 1.7 -1.7 -0.8 -0.3
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Total Return (% pa) 6.9 3.5 4.6 5.2
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Source: Colliers International, MSCI Source: Colliers International
6 Research & Forecast Report | REIF | Q1 2018 | Colliers InternationalShopping centre retailers are feeling the same pressures as high returning in 2020. Over the 2018-2022 period, Colliers expects rental
street retailers. According to data from the MSCI quarterly index, growth to average 0.4% annually. Given the uncertainties hovering
annual shopping centre rental growth fell to 1.2% y/y in Q4 2017, over the sector, yields are forecast to drift out slowly over the forecast
down from 1.6% y/y in Q4 2016 and the weakest growth in two horizon from around 4.8% to 5.0% in 2021. The yield impact will
years. Rents were largely flat for smaller schemes ( 50,000sqm ) consistent with large regional centres. Overall,
vacancy rates crept up to 6.6% in Q4 2017 from 5.7% in Q4 2016.
Like high street operators, shopping centre occupiers face another
challenging year with an increase in cost pressure weighing on
retailer profitability. Footfall Growth
Retail Park Shopping Centre High Street
Despite positive rental growth at the end of 2017, Colliers expects Retail Park Shopping Centre High Street
8%
shopping centre rents to decline by 1.5% in 2018 and by 0.5% in 8%
2019. Thereafter, marginal rental growth is forecast with the average
% Change Year-on- Year (3 month moving average)
6%
% Change Year-on- Year (3 month moving average)
rate until 2022 at just 0.1% pa. Equivalent yields are predicted to 6%
soften by 37bps this year as a general repricing of secondary space
4%
occurs, followed by a further 10bps in each of the following two 4%
years. Hence, capital values will fall for all but the largest regional
2%
prime centres. 2%
0%
Retail Warehouses 0%
Retail warehouse performance showed resilience to economic and -2%
-2%
political uncertainty in 2017 and continued to attract both UK and
overseas investors. Total investment volumes in 2017 (£2.8bn) were -4%
-4%
virtually unchanged against 2016, despite lacklustre rental growth
expectations. This reflects, perhaps, an ongoing appetite for relatively -
-6%
-
-6%
Aug-14
Aug-16
Aug-15
Nov-17
Aug-13
May-14
May-16
Aug-17
May-15
stable long income. Vacancy rates (financial) fell to the lowest level
May-13
Feb-14
Feb-16
Feb-18
Feb-15
May-17
Feb-13
Feb-17
Nov-14
Nov-16
Nov-15
Nov-13
Aug-14
Aug-16
Aug-15
Nov-17
Aug-13
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Aug-17
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May-13
Feb-14
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Feb-17
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Nov-13
since 2007. Occupier demand for retail warehouse space remains
steady. Increasingly, investment demand for retail warehouses and
Source: Springboard
new retail park developments is supported by alternative use value, Source: Springboard
whether as a response to structural changes in the retail distribution
landscape or as a response to rising land values, driven by demand
for residential development. This is especially the case for areas
within the M25. Moreover, changing consumer behaviour and rising
online sales are likely to drive demand for retail warehouse space
further, due to convenience, the rise of ‘click and collect’ and the
ease of ‘returns’ that accessible retail parks offer. Easy access and
free parking continue to drive shoppers to retail parks and a strong
interest remains amongst developers for new schemes. Given stable
occupational demand for space by a wide range of operators and low
vacancy rates, Colliers forecasts stable rents for retail warehouses in
2018 as household spending begins to recover. This will be followed
by a modest increase of 0.8% in 2019 rising to 1.6% annual rate by
2021. Capital growth will remain limited, with minor falls in 2018
(-1.6%) and 2019 (-0.3%) before a modest recovery over the forecast
horizon as rental growth begins to strengthen.
Supermarkets
At -0.8% y/y, rental growth for supermarkets remained in negative
territory in Q4 2017, thereby extending the sequence of decline to 11
quarters as occupier demand continues to be constrained by changes in
formats and slower sales growth. Data from the ONS shows that food
sales volumes fell for a seventh consecutive month in February as food
price inflation remains elevated.
That said, at 2.7%, the food store deflator suggests that the rate of
food store inflation in February has slowed further from November’s
recent peak of 3.6% and should continue to trend downward in
the coming months. This, in turn, should provide a pillar of support
for supermarkets. After falling by 0.8% in 2017, Colliers forecasts
supermarkets rents to stabilise in 2018, with marginal growth
Colliers International | Q1 2018 | REIF | Research & Forecast Report 7Offices Annual Office Rental Growth Forecasts
2% 2018 2018-2022
Central London
Despite expectations of Brexit-related volatility disrupting the UK 1%
economy, Central London has remained a relatively stable and attractive
market for overseas investors and occupiers. City investment volumes
reached £7.5bn in 2017, with around 90% accounted for by overseas
0%
investors (Property Data Ltd). The top two deals of 2017 were linked
to Chinese investors and both deals exceeded £1.1bn with yields on
either side of 3.4%. In Q1 2018, the song remains the same, with foreign
investors taking the top four deals. -1%
West End investment reached £2.7bn in 2017, somewhat ahead of 2016,
but in line with the 10-year average of £2.6bn. Preliminary data for 2018
suggests that Q1 may be off to a slow start. This may reflect the impact -2%
of higher prices and diminished expectations of rental growth, but most South East Rest of UK West End City of London
decisively, the absence of stock, with few active sellers in the market.
Anecdotal evidence suggests that a few substantial assets are likely to Source: Colliers International
come onto the market imminently. Similar to the City investor trend, cross
border investors accounted for a large proportion of overall activity, while
UK buyers were largely absent from the West End market.
Despite the Chancellor of the Exchequer announcing that foreign Central London Grade
City A Vacancy
West End Rates
investors will be liable to pay capital gains tax on UK property, the
appetite for prime London assets remains strong given their scarcity
10%
value to international investors. Consequently, for many foreign investors, City West End
who remain enticed by sterling that is considered by many to remain
undervalued, London assets still provide a good value when compared to 8%
10%
other global cities. Yields may slip as international investors respond to
the new CGT regime and also to rising sterling, but such slippage will act 6%
8%
to attract a new tier of investors, hence modest recompression of yields
is anticipated later in the forecast horizon. 4%
6%
In the City of London and the West End, headline rents began to edge
2%
down from Q2 2016, but stabilised in mid-2017 and stand at £68.50 4%
psf and £120 psf, respectively. Demand for prime space remains
steady and there continues to be a lack of supply as a large proportion 0%
2%
2000 Q4
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2011 Q4
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2015 Q4
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2017 Q4
of schemes under development are already pre-let. The lack of supply
should, in theory, drive up rents, but occupiers look less willing to 0%
pay high rents given other increases in occupational costs, especially
2000 Q4
2001 Q4
2002 Q4
2003 Q4
2004 Q4
2005 Q4
2006 Q4
2007 Q4
2008 Q4
2009 Q4
2010 Q4
2011 Q4
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the pressure of increased business rates. Increasingly, landlords are
Source: Colliers International
offering incentives to hold the headline rents stable. Some landlords
are also choosing to sit on empty office space rather than lower rents
to secure tenants. Lack of Grade A space in suitable formats and sizes
may also be impacting.
The vacancy rate for London has been on the rise in recent years, Central London leasing take-up by Origin
although the upward movement slowed in the second half of 2017,
suggesting stronger demand. Likewise, Grade A absorption in
3
submarkets such as Bloomsbury, Covent Garden and Paddington
changed from negative in 2016 to strongly positive in 2017 in a setting of 10 year average 2017 total
relatively low vacancy rates. The EU Summit in June may bring greater
certainty as to where the UK/EU may be headed in terms of a new 2
commercial relationship. This may prove to be a pivot point for the City,
Millions sq ft
although the evidence, so far, has been positive with a wide range of
occupiers chasing space across the full range of London submarkets. In
fact, demand from ex-UK headquartered businesses is well above long 1
term averages, with North American and European take-up at 3x and
2x their respective ten-year averages in 2017. Despite these relatively
strong demand conditions, Colliers forecasts that Central London rents
will fall by 1.2% in 2018 and 0.7% in 2019. The City and Midtown are 0
anticipated to fall by 1.5%, while rents in the West End are forecast to fall Asia Pacific European North American
by 1%. This reflects, in large measure, normal cyclical cooling of rental
growth after a period of sustained growth, but also a response to the Source: Colliers International
8 Research & Forecast Report | REIF | Q1 2018 | Colliers Internationalphenomenal increase in occupier costs brought on by the extraordinary
increase in commercial rates. Look for renewed rental growth by 2020. Office Forecast Summary
South Eastern Offices DEC-17 DEC-18 DEC-19
ANNUALISED
2018-2022
In terms of investment volumes, the South East recorded transactions ERV Growth (% pa) 1.5 0.0 0.4 1.5
worth £2.8bn in 2017 - a 50% increase compared to 2016. This reflects
a general pick-up in regional investment as domestic and international Equivalent Yield (% eop) 5.8 5.8 5.9 5.9 (2022)
investors continue to look for yield and find less competition for product
outside of London. This trend is continuing in 2018. Prime offices in Capital Growth (% pa) 3.6 0.5 0.0 0.8
the South East are trading at 5% to 5.5% - a full percentage point (or
more) higher than in Central London, which has seen more sub 4% deals Total Return (% pa) 7.9 4.7 4.3 5.2
in Q1. The largest South East transactions in 2017 include the £365mn
purchase of Winnersh triangle by Frasers Centrepoint Ltd and CPPIBs
50% stake in Milton Park for £200mn. In Q1 2018, Swiss Life bought
Oxford Business Park for £35m at 4.9% IY.
Leasing activity in 2017 was down by around 13% compared to 2016,
although in Q4 2017 take-up across the South East surged as numerous Increase in Prime Headline Office Rents
large deals completed, accounting for 852,204 sq ft of office space. between 2012 and 2017
Three deals topped 50,000 sq ft, with Asos taking 75,000 sq ft at
Leavesdon Park in Watford, WeWork taking 53,000 sq ft in Hammersmith 20%
and FM Insurance taking 56,000 sq ft at Voyager Place, Maidenhead.
18%
Although availability in some towns across the South East increased last
year, vacancy levels generally continue to fall. The Q4 17 surge looks to 16%
have passed, with preliminary Q1 2018 figures suggesting that demand 14%
has moderated and is short of the five-year quarterly average. Like other 12%
commercial sectors, a general lack of development has given rise to a
10%
general shortage of Grade A space. Furthermore, permitted development
rights have given rise to the removal of Grade B space for conversion 8%
into residential. This has kept overall vacancy rates low across the SE 6%
markets. Moreover, a predicted acceleration of employment growth
4%
(Oxford Economics) across the financial and business services sector will
boost demand for office space further. Colliers expects rental growth of 2%
1.0% in 2018 and 1.6% in 2019. The five-year annualised growth rate is 0%
anticipated to reach 2.0% in 2018-2022. Coupled with steady investment
ol
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demand, yields will drift out only slowly, hence, total returns averaging
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Gl
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6.1% per annum over the forecast period will place South East offices in
M
Bi
the stronger tier of performance.
Source: Colliers International
Rest of UK Offices
Occupational markets in ‘Rest of UK’ remain steady as there continues
to be a shortage of Grade A space. This was highlighted by continued
rental growth across most regions. According to the MSCI quarterly
index, office rental growth in Q4 2017 was particularly strong in the East
of England at 4.4% y/y and in the South West at 3.6% y/y. The West Prime Headline Rents in the ‘Big Six’
Midlands and the North East saw much weaker growth at 0.8% y/y
and 0.6% y/y respectively, with both regions experiencing a significant
37.5
slowing in rental growth compared to the same quarter in 2016. Scotland
recorded a further decline in rent of 2.1% y/y. There was generally an
encouraging trend with regards to office prime headline rents across 35.0
the ‘Big Six’ markets. In Bristol and Leeds, headline rents finally broke
through the £30psf barrier last year, with rental growth of 14.0% y/y 32.5
and 7.1% y/y respectively. Edinburgh recorded a 3.3% y/y increase,
£ psf
with headline rents now at £31psf, while rents were flat in Birmingham 30.0
(£32.50psf), Glasgow (£30psf) and Manchester (£35psf). A period of
consolidation is likely for the main regional CBDs before further headline 27.5
rental uplifts. Manchester is anticipated by some as very likely to break
the £40psf level by 2020 given the ongoing political commitment to
25.0
investment in, and development of, the Northern Powerhouse. Colliers 2012 2013 2014 2015 2016 2017
predicts Rest of UK office rents to increase by 1.2% in 2018 and 2019 Bristol Birmingham Manchester
before accelerating slightly. Like South East offices, the Rest of UK will Leeds Edinburgh Glasgow
be among the stronger tier of performance, with total returns forecast to
average 6.3% per annum through 2022.
Source: Colliers International
Colliers International | Q1 2018 | REIF | Research & Forecast Report 9Industrial Industrial Annual Rental Growth Forecasts
2012-2016 2017 2018-2022 F
Standard Industrial and
7.0%
Distribution Warehouses 6.0%
5.0%
Official data suggests that the industrial sector remains in relatively good
shape at the start of 2018, with production rising for a ninth straight
4.0%
month, the longest spell of continuous growth since comparable records
began in 1968. This reflects the role that industrial and distribution play 3.0%
in supply side economics that are not greatly impacted by political events,
as well as by the structural changes that continue to impact the sector 2.0%
positively. Manufacturing PMI data from IHS Markit/CIPS highlighted that
growth slowed modestly in Q1 18, but improving demand and ongoing job 1.0%
creation in the sector are consistent with a headline PMI that remained
0.0%
well above long-run averages. Furthermore, forward-looking indicators, Standard Industrials Distribution Warehouses
such as the new orders to inventory ratio and business expectations
Source: Colliers International, MSCI
index, point to further growth in 2018.
Given this economic trajectory, the industrial sector is forecast to
continue outperforming the other main commercial sectors. Occupational UK Goods Trade Balance by Country in 2016 (£bn)
markets remain very strong. In 2017, take-up for units over 100,000 sq
ft moderated to 27m sq ft (down from 32m sq ft in 2016), but the 2017 Germany
China
total was in line with the 10-year average and we predict that take-up
Netherlands
in 2018 will rebound to over 30m sq ft. The ongoing lack of Grade A Belgium & Luxembourg
space will continue to support rents, especially in London, the South Italy
East and the East. Secondary locations such as Kent and Bicester will Spain
begin to grow further in importance. Despite these strong supports, France
rental growth is forecast to moderate in 2018 to a 3.7% pa rate by year Poland
end and fall further in 2019 to a 2.4% pa rate, before re-accelerating in Japan
Turkey
2020 as a strengthening economy begins to exert renewed pressure.
Sweden
Over the forecast horizon to 2022, annualised rental growth will average Canada
3.2%. London is expected to be the standout performer once again, with Switzerland
annualised rental growth of 5.1%, followed by the South East at 3.5%, the Hong Kong
Rest of the UK at 2.5% and Distribution Warehouses at 2.4%. South Korea
Singapore
Given these rental projections, it is not surprising that investment demand Saudi Arabia
for industrial remains very strong. Yields hardened across all regions in Irish Republic
2017 and Colliers forecasts an additional hardening of 24 bps in 2018, United Arab Emirates
before stabilising and drifting out slightly over the forecast horizon. Total United States
returns, annualised through 2022, will average 7.0%, with performance -35 -30 -25 -20 -15 -10 -5 0 5 10 15
front loaded. Total returns for 2018 are forecast at 12.5%, down from (000s)
Source: ONS
a phenomenal 19.6% in 2017.
Purchasing Manager Indices
65
Expansion
60
55
Logistics & Industrial Forecast Summary
50
ANNUALISED
DEC-17 DEC-18 DEC-19
2018-2022
Services
45
ERV Growth (% pa) 5.3 3.7 2.4 3.2 Manufacturing Contraction
Construction
Equivalent Yield (% eop) 5.7 5.4 5.5 5.7 (2022) 40
Capital Growth (% pa) 13.9 7.4 1.5 2.2 35
Mar 14
Mar 16
Mar 18
Mar 15
Mar 17
Total Return (% pa) 19.6 12.5 6.2 7.0
Source: Colliers International, MSCI Source: IHS Markit
10 Research & Forecast Report | REIF | Q1 2018 | Colliers International15,400 employees in
69 countries on
6 continents
$2.7
billion in
annual revenue
2.0
billion square feet
under management
$116
billion in total
transaction value
FOR MORE INFORMATION
RESEARCH & FORECASTING NATIONAL CAPITAL MARKETS COLLIERS CAPITAL VALUATION & ADVISORY
Walter Boettcher Michael Kershaw Nigel Holroyd Russell Francis
+44 20 7344 6581 +44 20 7344 6808 +44 20 7487 1719 +44 20 7344 6801
walter.boettcher@colliers.com michael.kershaw@colliers.com nigel.holroyd@colliers.com russell.francis@colliers.com
Oliver Kolodseike
+44 20 7487 1671
oliver.kolodseike@colliers.com
This report gives information based primarily on Colliers International data, which may be Colliers International | UK
helpful in anticipating trends in the property sector. However, no warranty is given as to the
accuracy of, and no liability for negligence is accepted in relation to, the forecasts, figures or 50 George Street
conclusions contained in this report and they must not be relied on for investment or any other London W1U 7GA
purposes. This report does not constitute and must not be treated as investment or valuation
advice or an offer to buy or sell property.
Colliers International is the licensed trading name of Colliers International Property Advisers
colliers.com/uk
UK LLP (a limited liability partnership registered in England and Wales with registered number
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