Slower Growth In 2018 But Commercial Market Remains Firm

Transcription

1 Economics Sponsored by: Slower Growth In 218 But Commercial Market Remains Firm UK Economy and Property Market Chart Book Q1 218

2 2 RICS Economics 217 Q1 218

3 Contents Economic outlook...4 UK Economy...-6 Housing market Commercial property sector Construction sector Market surveys and reports...13 RICS Survey Release Dates Frequency Survey Period covering Release date Monthly RICS Residential Market Survey January 8-Feb-18 Semi-Annually RICS Rural Market Survey H Feb-18 Monthly RICS Residential Market Survey February 8-Mar-18 Monthly RICS Residential Market Survey March 12-Apr-18 Quarterly RICS Construction Market Survey Q Apr-18 Quarterly RICS UK Commercial Property Market Survey Q Apr-18 Quarterly RICS Global Commercial Property Market Survey Q Apr-18 3 RICS Economics 217 Q1 218

4 Economic outlook The economy ended 217 on a relatively firm note if the prelimary estimate for GDP covering the final three months of the year is to be believed. However, it remains to be seen whether this more positive trend can be sustained over the coming months with most forecasts still pointing towards a more anaemic performance as households continue to grapple with a squeeze on their purchasing power. A key factor underlying the challenge for consumers is the acceleration in headline inflation which reached a five year high of 3.1% in November 217 and remains just below that level currently. This has been driven upwards by the jump in import costs on the back of the depreciation in sterling last year. More recently, the currency has retraced some of its losses but this has yet to filter through into lower prices. Meanwhile, there has been little evidence that wages are responding to what on the face of it appears to be a tight labour market, Unemployment now stands at just 4.3%, its lowest level since 197; over the past twelve months, it has declined from 4.8%. Yet official data on growth in regular pay has barely budged and remains stuck in the 2 to 2.% area (on an annual comparison). Against this backdrop, it is perhaps not surprising consumer confidence has slipped to its lowest level since 213. Alongside this, uncertainty linked to both Brexit negotiations and the political environment are clearly weighing on business sentiment. This has manifested itself most visibly in corporate capex which has been lagging some way behind the firmer trend in profitability. Significantly, there seems little prospect that either of these headwinds will fade anytime soon. This is evident in the feedback to the latest RICS Commercial Property Market Survey; while less than one-fifth of respondents indicate that they have already received enquiries from firms looking to relocate away from the UK in response to Brexit, this is expected to more than double over the next two years. Notwithstanding these challenges, one reason why the UK economy could do rather better than expected over the course of this year is the improving global economic climate. The IMF recently described it as the broadest synchronized global growth upsurge since 21 noting that there have been notable upside surprises in Europe and Asia. This, coupled with the still competive currency, has the potential to drive a further upswing in the export performance. For the time being, the Bank of England appears in no rush to add to the first hike in interest rates in a decade that it sanctioned in November. Although inflation remains well above the 2% target, there is a suspicion amongst policymakers that it is more likely to gradually soften than accelerate any further. Moreover recent speeches from members of the key decision making committee highlight concern about some of the macro indicators. In view of this, it is not altogether surprising that money markets are currently only betting on one more round of monetary tightening over the remainder of this year. As we have noted in the past, it is hard to talk about THE housing market as a single entity although this is the way so much of the narrative is conducted. For what it is worth, the RICS Housing Market Survey suggests that momentum has softened over the past few months with activity indicators on demand and supply negative and the price trend flattening. But this summary of results masks significantly divergent trends at a more local level. For example, the Newly Agreed Sales indicator is showing rather greater resilence away from London and the South East and the Price series is actually still strongly positive in Wales, Scotland, Northern Ireland, the North West and parts of the Midlands. In the last survey, we did probe contributors as to the likely impact of the change in stamp duty that was announced in the Budget. Almost nine-tenths of respondents across the UK as a whole said they had seen no immediate increase in first time buyer enquiries. Moreover, around two-thirds anticipated the change having little impact in the coming months while just 12% believed it would lead to a rise in overall activity. That said, the results for the capital were a little more encouraging. As regards commercial property, both the feedback to our survey and most other insight suggests the investment side of the market seems to be holding up better than the occupier side. The industrial segment, not surprisingly, continues to lead the way with robust rental and capital value gains projected for the coming year. The contrast to this is visible in the the woes being encountered by parts of the retail sector. Poor Christmas sales were highlighted in the trading statements of a number of familiar high street names with this reflected in the forward looking indicators (in the RICS Commercial Property Survey) particularly for secondary retail space. Significantly, demand from overseas buyers continues to rise steadily across the country with London still viewed as particularly attractive despite its somewhat stretched valuation. Recent official construction data has been quite volatile making it difficult to draw a clear picture as to the underlying trend. For the record, the just released RICS Q4 Construction Market Survey results are still consistent with an increase in output. Indeed, workloads continue to rise firmly, predominately driven by the private housing and commercial sectors. Even so, feedback from contributors highlights risks to future output growth; in the latest report, 8% of respondents cited financial constraints as a factor limiting activity. At the same time, the shortage of labour is still believed to be a key issue for the market, with respondents noting a particular lack of quantity surveyors and bricklayers. 4 RICS Economics 217 Q1 218

5 UK Economy 1. GDP is estimated to have increased by.% in the final quarter of 217 representing the strongest quarter-on-quarter growth rate through the year. Although this was insufficient to prevent a softening in the average annual growth rate relative to the previous year, the pick-up in Q4 does provide some encouragement looking forward. 2. One reason for encouragement is the pick-up in the volume of world trade over the past year; this could show futher improvement as global growth strengthens and should support a reasonably favourable backdrop for UK exporters. 3. By way of contrast, households face a more challenging environment; the annual growth rate of retail sales excluding fuel fell to just 1% in December. This was slowest growth rate since 214 and reflects the growing pressure on household finances. With the inflation rate at a five year high, and wage growth subdued, there is little reason to anticipate high street spending will rebound smartly in the near term. Chart 1 GDP 1. Quaterly % change Source: ONS Chart 2 Chart 3 2 Annual% change World Trade Index 1 Annual % change Retail Sales Volumes Source: CPB Source: ONS RICS Economics 217 Q1 218

6 UK Economy 4. The labour market has been strengthening since 211 with the employment rate now at a record high of 7.3%. Significantly, this positive trend has over the past year been led by an increase in full time rather than part-time employment. Forward looking indicators suggest the market will remain tight in the coming year.. The CPI measure of inflation reached a five year high near the end of 217, whilst wage growth remained sluggish (hovering around 2% throughout the year). This has resulted in a decline in real wages, squeezing consumers purchasing power. The inflation rate may gradually begin to retreat as the year progresses but it will be somewhile before this is felt in household finances. 6. Markets currently expect just one hike in interest rates this year with the base rate projected to be only 1% in mid-22. Sentiment could, however, turn more hawkish if economic news flow improves pointing to a stronger macro outlook. Chart 4 Employment 76 % Annual % change Employment Rate (LHS) Full-time Employment (RHS) Part-time Employment (RHS) Source: ONS Chart Chart % Consumer Prices and Real Earnings Headline inflation (LHS) Real earnings (RHS) Annual % change % Implied Path For Interest Rates Source: ONS -3-4 Oct/217 Apr/218 Oct/218 Apr/219 Oct/219 Apr/22 Oct/22 Source: Bank of England 6 RICS Economics 217 Q1 218

7 Housing market 7. The RICS headline house price balance has moderated throughout last year, hovering in the range of +8 and zero; this is consistent with a flatter trend in house price inflation over the coming months. 8. Mortgage approvals, measured on a seasonally adjusted basis, fell in December to their lowest level since January 21. This chimes with the trend in the RICS New Buyer Enquiries series (a measure of demand) which has recorded negative readings, albeit only very marginally in some cases, in each of the past nine monthly reports. Significantly as an indicator of the change in mortgage volumes with a three month lead, this points to the softer trend persisting at least during the first half of the year. 9. The softer tone in demand allied to a decline in new instructions coming on to the market continues to impact on activity levels. For the whole of 217, the volumes of transactions was little changed from each of the previous three years at just over 1.2 million; the likelihood is the 218 number will be a little lower. Chart RICS National House Price Balance and Land Registry House Prices RICS House Prices adv. 6 months (LHS) Land Registry England and Wales House Price Index (RHS) Source: Land Registry, RICS Chart 8 Chart 9 1 RICS New Buyer Enquiries and Bank of England Mortgage Approvals 1 8 RICS Agreed Sales and HMRC Property Transactions RICS NBE adv. 3 months (LHS) Mortgage Approvals (RHS) RICS Newly Agreed Sales - adv. 6 months (LHS) HMRC Transactions (RHS) Source: Bank of England, RICS Source: HMRC, RICS 7 RICS Economics 217 Q1 218

8 Housing market 1. In comparison to other parts of the UK, London continues to return the most negative sentiment in the survey. The London price balance (which mainly tracks developments in Inner London) has remained in negative territory for 22 consecutive reports, and suggests that prices will continue to soften in this area over the coming six months. 11. The sales picture across the capital is also notably downbeat. In the previous few months, respondents to the RICS have reported a flat or negative sales trend across parts of the country, however the London figures are particularity negative. Indeed, they are currently pointing to a further decline in transactions in the first half of In response to an additional question included in the survey, the majority of respondents suggested the Stamp Duty exemption for First Time Buyers announced in the Autumn Budget will have little impact on market activity. Only around one-quarter judged that it would lead to a some increase in activity. Chart 1 London House Prices 1 Net balance % RICS London House Prices adv. 6 months (LHS) -8-1 Land Registry Inner London House Price Index (RHS) Source: Land Registry, RICS Chart 11 Chart Net balance % (3 month average) London Transactions Annual% change (3 month average) RICS London Newly Agreed Sales adv. 6 months (LHS) Land Registry London Transactions (RHS) In your area, which of the following do you feel will be the likely impact of the change in Stamp Duty? % of respondents Source: Land Registry, RICS Little Impact A Combination of higher prices and actvity Higher overall activity Higher Prices Source: RICS 8 RICS Economics 217 Q1 218

9 Commercial property sector 13. The headline RICS Rental Expectations series edged lower in the latest report while still remaining in positive territory. This was driven mainly by a downbeat near-term outlook for retail rents. Still, the series suggests that rental values at a headline level will see a modest rise in Sentiment across the industrials sector is comparatively more upbeat than the retail and office segments of the market. Indeed tenant demand has only continued to rise firmly in this part of the market. This is, in turn, being reflected in near term rental expectations which are pointing to a solid rise in industrial rental values in the coming year. 1. For London, aggregate rental expectations have remained in negative territory in all four quarters of 217. The picture for office rents in the capital is being, to some extent, masked by the rising level of inducement packages on offer. Nevertheless, the latest readings are consistent with a drop in rental values through the course of the year. Chart RICS Rent Expectations and CBRE Rental Values RICS UK Rent Expectations adv. 3q (LHS) CBRE UK Rental Values (RHS) Source: CBRE, RICS Chart 14 Chart 1 7 Industrial Rental Values 7 London Offices Rental Values RICS Industrial Rent Expectations adv. 4q (LHS) -9 CBRE Industrial Rental Values (RHS) Source: CBRE, RICS -9 RICS London Office Rent Expectations adv. 3q (LHS) -3 CBRE Central London Offices Rental Values (RHS) Source: CBRE, RICS 9 RICS Economics 217 Q1 218

10 Commercial property sector 16. The picture across the investment side of the market is more upbeat than the occupier side. RICS headline Investment Enquiries series has edged up in the last two reports with investor demand picking up in the industrial and office segments of the market. As such, the series is now pointing to a further rise in capital values in Significantly, the commercial real estate market continues to draw considerable interest from overseas investors. Respondents to the RICS Commercial Property Survey are reporting a steady rise in foreign investment enquiries across most parts of the UK. London remains a market of particular interest despite further feedback suggesting that it is widely perceived to be expensive (63% of respondents to the latest survey suggest it is to some extent overpriced). 18. Meanwhile, the net balance of respondents reporting a rise in London office enquires rose once again in the latest results. As such, the series is now consistent with a further increase in Central London capital values highlighting the ongoing disconnect with the occupier market. Chart 16 RICS Investment Enquiries and CBRE Capital Values RICS UK Investment Enquiries adv. 3q (LHS) -6 CBRE UK Capital Values (RHS) Source: CBRE, RICS Chart 17 Chart 18 3 Foreign Investment Enquiries- Change From The Last Quarter 1 London Offices Investment Enquiries National Central London Q1 217 Q2 217 Q3 217 Q4 Source: RICS -4-6 RICS London Office Investment Enquiries adv. 3q (LHS) -8 CBRE Central London Offices Capital Values (RHS) Source: CBRE, RICS RICS Economics 217 Q1 218

11 Construction sector 19. Construction output was estimated to have decreased by one percent during the final quarter of last year, although this series is often heavily revised. Moreover, this follows a contraction in output in both of the previous two quarters. However despite this, the volume of construction activity is still reported to have been.6% higher than in the same period of The RICS Construction Market Survey continues to signal a stronger picture with the headline workloads series remaining in a tight range (+21 to +27 through 217) and is consistent with a steady rise in output in the near term. Infrastructure workloads also remain solid with contributors noting increases across the roads and rail categories. 21. Despite the construction industry facing capacity constraints, the results of the latest survey still point to a relatively optimistic outlook for workloads and employment. The picture regarding profit margins is a little flatter. Chart 19 Construction Output 1 % Change Quarter-on-Quarter Growth Year-on-Year Growth Source: ONS Chart 2 Chart 21 6 Net balance % RICS Workloads and ONS Construction Output Annual % change Net balance % 12m Workloads, Employment and Profit Margins Expectations RICS Workloads adv. 1q (LHS) ONS Construction Output (RHS) Workloads Employment Profit Margins Source: ONS, RICS Source: RICS 11 RICS Economics 217 Q1 218

12 Construction sector 22. The lack of sufficiently skilled workers remains a key issue for firms with contributors continuing to emphasise the adverse impact it is having on the market. The net balance of respondents reporting a lack of suitable labour has held broadly steady over the past year and suggests that unfilled vacancies in the construction sector will remain between 2, and 3, in However skill shortages are not the only headwind impeding development; 8% of respondents in the latest report cited financial constraints as limiting market activity with 6% of contributors reporting planning and regulation as a key drag on growth. 24. Only 12% of respondents were confident that policies announced by the government in the White Paper and the Budget will be successful in lifting housing delivery to its target of 3, per year. The majority of contributors were unsure whilst 43% believed the policies will be unsuccessful in meeting this objective. Chart 22 RICS Skills Shortages and ONS Unfilled Vacancies 7 % reporting 'yes' 4 6 RICS Skills Shortages Average adv. 1 year (LHS) ONS Construction Unfilled Vacancies (RHS) Source: RICS, ONS Chart 23 Chart % of respondents RICS Factors Limiting Activity 4 4 Do you feel policies included in the Autumn Budget and Housing White Paper will lift housing delivery to the target of 3, per year? % of respondents Insufficient demand Weather conditions Shortage of labour Shortage of materials Financial constraints Competition Planning & regulation Source: RICS Very confident Fairly confident Unsure Fairly confident Very confident Yes - No Source: RICS 12 RICS Economics 217 Q1 218

13 UK Property Market Chart Book Market Surveys & Reports Why the RICS surveys? The RICS poll - considered one of the most reliable guides to movements in house prices. Financial Times The RICS survey - the best short-term lead indicator of house prices and activity in our view. Goldman Sachs The RICS Survey has been a good leading indicator for the direction of and inflection points in the IPD index, and therefore the UK commercial property market overall. Morgan Stanley The RICS Commercial Property Survey is an excellent predictor of future IPD total returns. North Row Capital Download RICS Economic market surveys and reports at www. UK Residential Market Survey (monthly) UK Construction Market Survey (quarterly) UK Commercial Market Survey (quarterly) UK Rural Market Survey (semi-annual) Global Commercial Market Monitor (quarterly) RICS / Ci Portuguese Housing Market Survey (monthly) Hong Kong Residential Market Survey (monthly) The Economics Team Simon Rubinsohn, Chief Economist srubinsohn@rics.org +44 () Jeffrey Matsu, Senior Economist jmatsu@rics.org +44 () Sean Ellison, Senior Economist sellison@rics.org Kisa Zehra, Economist kzehra@rics.org, +44 () Tarrant Parsons, Economist tparsons@rics.org, + 44 () Janet Guilfoyle, Surveys Administrator jguilfoyle@rics.org, +44 () RICS Economics 217 Q1 218

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