All Property Forecasts

Transcription

1 Research & Forecast Report UK Central London REIF H Accelerating success. All Property Forecasts The 2013 all property total return was estimated at 10., based on 6. income return and 3. capital growth. A marked increase in the amount of money chasing UK commercial property drove yield compression of 30bps, pushing the all property yield down to 6.. Colliers International s forecast for the 2014 IPD total return is 13.7%, primarily driven by further yield compression of 30bps pushing the all-property equivalent yield to 6.5%. We expect rental growth to contribute meaningfully this year for Central London and South Eastern offices, and to spread out to other regions and sectors from Offices are expected to be our top performing sector this year with total returns approaching 15%, driven primarily by yield compression of 35bps to 6.5%. Although yields in Central London are already low, we see scope for modest compression. The influx of foreign investors means the characteristics of the typical Central London office investor is changing; this means investors with longer investment horizons who are less concerned with future yield compression to support returns and are more focused on quality of location and security of capital. In addition, we expect significantly higher rental growth in these markets (average of 5. over the next five years) when compared with other regions and sectors. Over a five year horizon we still expect offices to outperform, with total returns of 1 compared to 1 for industrial and 6. for retail. All Property Forecast Summary ERV Growth (% pa) Equivalent Yield (% eop) (2018) Capital Growth (% pa) Total Return (% pa) Total Return by Sector % Annualised Retail Offices Industrial All Property Total Return %pa City Offices South Eastern Offices Rest of London Offices West End Offices Midtown Offices Rest of UK Offices (excl SE) Standard Ind'l & Ind'l Parks Inner London Offices Distribution Warehouses All Property % ERV Growth %pa West End Offices City Offices Midtown Offices Inner London Offices Rest of London Offices South Eastern Offices All Property Rest of UK Offices (excl SE) Standard Ind'l & Ind'l Parks Supermarkets %

2 Economic Outlook GDP grew by 1.9% in 2013 and the UK economy has built up considerable momentum over the second half of last year. The recovery has largely been consumer driven thus far, propped up by a revival in the housing market and a surge in consumer confidence. News that inflation fell back to the target in December 2013 suggests the economy is entering a sweet-spot of high growth and low inflation, which bodes well for household incomes and also alleviates some of the pressure for a rise in interest rates. Markets expect interest rates to rise in 2015, not least because the bank s 7% unemployment forward guidance waystation is being reached much sooner than expected. Our forecasts are tempered by a small rate-rise to 0.65% in late 2015 in line with market forward rates, although significant rate hikes seem unlikely until tax revenues recover, inflation pressure rises and wages begin to increase in real terms. Consensus forecasts suggest GDP growth of 2. in 2014 and most forecasters expect trend growth to continue in the medium term. Activity is not just restricted to London, Experian forecast average GDP growth of 1.9% and FBS employment growth of 2.5% this year in the regions, suggesting a broader based recovery across the UK as a whole. GDP forecasts are underpinned by expectations of a sustained level of household spending and an upswing in business investment and exports. Investment is slowly building momentum and there is no shortage of available funds for investment once confidence returns, companies are sitting on huge stockpiles of cash while the cost and availability of debt is improving. Exports disappointed in 2013, but we expect a strengthening global economy to underpin a steady recovery in total exports from 2014 onwards, provided Eurozone demand steadily improves and the exchange rate stabilises after its 1 appreciation in trade-weighted terms last year. Investment Market Outlook Investment volumes for 2013 currently stand at 53bn, a 5 increase on the previous year. Overseas investors continue to dominate, but notably, UK institutions returned to the market with their highest level of net investment since This surge in activity has unsurprisingly coincided with yield compression and all property equivalent yields edged down 30bps on the monthly index in We expect overseas investors to continue to make large investments and a marked increase in fund inflows in 2013 suggests UK institutions will continue to have funds to invest. Investors are also moving out to the regions, ex-london investment volumes totalled 20bn in 2013, driven by the intense competition for London assets and the relative attractiveness of higher yields in improving regional occupier markets. We expect this trend to continue as London yields are driven lower and regional occupier markets continue to strengthen. Secondary property will become increasingly targeted as investors search for yield, the prime/non- Consensus Forecasts (Independents) Source: HM Treasury Selected Rates 1 9% 7% 5% 3% 1% Dec-1995 Dec-1996 Property-Gilt Spread 10Y GILT Base rate IPD Equivalent Yield Source: IPD, Haver Net Investment into Funds by Asset Class: Property Dec-08 GDP MILLIONS Fixed Investment Dec-09 Exports Dec Private Consumption Dec-1997 Dec-1998 Dec-1999 Dec-2000 Dec-2001 Dec-2002 Dec-2003 Dec-2004 Dec-2005 Dec-2006 Dec-2007 Dec-2008 Dec-2009 Dec-2010 Dec-2011 Dec-2012 Dec-2013 Dec-11 Source: IMA (UK domiciled unit trust / OEIC net sales) Dec-12 Govt Consumption Dec-13 2 Research & Forecast Report H REIF Colliers International

3 prime yield spread has stabilised, but still remains at historical highs and provides opportunities for selective investors. Ten year gilts dropped from over 5% in 2009 to a low 1. in 2012, yet the IPD all property equivalent yield remained at circa 7% as funding margins increased six-fold. While gilt yields have been on an upward trajectory since mid-2012, overall funding costs have been falling as margins are competed down by a broader range of lenders. Weight of capital entering the debt market for commercial real estate should drive margins lower, mitigating the upwards pressure on property yields from rising gilts. Accordingly, with the property equivalent yield-gilt spread currently at 400bps we see scope for property yields to fall, particularly in 2014 as the first base rate rise remains at least a year away. Of course, forecasts risks exist, notably from a lack of available stock. Construction spending as percentage of capital value of existing property in the IPD hasn t broken the barrier since Some markets, particularly regional offices and South East industrial, have little to no completions scheduled and are already suffering from a shortage of grade A stock. This will have the effect of either restricting investment activity, or driving yields even lower and enticing more vendors to cash-in. Retail Standard Shops: Central London London household spending growth forecasts for 2014 have been revised up to 2.9%, a sharp jump from the 1.7% growth in spending witnessed in 2012 as increasing consumer confidence and rising house prices facilitated falls in the saving rate and the beginning of another consumer-led recovery. Growth in spending is expected to remain largely at this level for the next five years. Central London s attraction as a global retail destination is undiminished and it remains highly popular with Chinese and Middle Eastern tourists, insulating it from some of the weak domestic economic drivers that have been affecting regional UK retail performance over the past few years. Central London vacancy stands at 3%, while the decision to relax current visa restrictions for Chinese residents is forecasted to increase spending in the UK by 3bn a year by Such a sharp increase in demand coupled with limited supply will push Central London retail rents higher. We expect Central London shops to have the highest rental growth of any other retail segment (3.7% average over the next five years). Standard Shops: Ex-Central London Shops outside of London continued their poor performance in 2013 with rents falling -1.. However there are signs that the market is stabilising with rental declines slowing; shop rents in the rest Retail Forecast Summary ERV Growth (% pa) Equivalent Yield (% eop) (2018) Capital Growth (% pa) Total Return (% pa) of the UK (excl South Eastern) on the IPD monthly index turned marginally positive in December after 63 months of continuous falls. Meanwhile the Colliers retail vacancy rate fell to 16.1% for the first time in 18 months and data from the Centre for Retail Research indicates retail insolvencies are slowing (2500 stores affected in 2013 v 3951 stores affected in 2012). Household spending forecasts for the rest of the UK have also been revised up, averaging 2. for the regions outside of London over the next 5 years. This all-encompassing segment obviously masks wide-divergence between regions, with the stronger performing South Eastern region (2.7% average) more in line with London than the rest of the UK (2. average). The regions outside of the South Eastern region are not expected to see household spending accelerate past until 2016 as the economic recovery takes longer to repair regional household balance sheets. We expect rents in standard shops outside Central London to halt their declines in 2014 and begin to rise slowly thereafter to average 1% over the next five years, our lowest performing retail sub-sector. This will obviously mask huge divergence between assets of varying quality, with rents on poorer quality assets likely to continue their declines, which currently stand at 3 below their peak. Downside risks remain as high streets continue to undergo significant structural change in the wake of the last recession and as online retail continues to rapidly grow its share of overall retail spend. While regional shops should benefit from improving economics, many towns still have an over-supply of retail space. Vacancy rates, although stable, have the potential to deteriorate if UK towns fail to reposition themselves in the changing retail landscape. Supermarkets As general retail rents began their decline in 2008, falling 7% to end 2013, supermarkets supported by their RPI-linked leases saw growth of 7%. Price inflation continues to be passed on with marginal effects on overall volumes, while strong population growth and positive net-migration will ensure demand expands over the next five years. Downside risks remain, retailers continue to compete heavily on price while customer-loyalty has waned as shoppers search out value for money and not just lower prices, adding increasing pressure to operating margins. Online grocery shopping is a very real threat to physical stores as burgeoning Number of Vacant Units as % of Total Units Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Source: Colliers International West End Central London National Research & Forecast Report H REIF Colliers International 3

4 home delivery growth moves sales away from large supermarkets to dark stores. Data from Verdict suggests supermarket sales growth will average per year over the next five years. The well-publicised spacerace may be over, but supermarket floorspace is still expected to grow by nearly 3% per year. This, combined with the popularity of RPI-linked leases, means we expect robust supermarket rental growth of 2.5% per year over the next five years. Shopping Centres IPD shopping centre rents have seen continual declines between , totalling nearly 1. This decline continued in 2013, but we expect shopping centre rents to stage a small recovery from 2014 onwards with growth averaging nearly 1% over the next five years. Although rents will benefit from the rise in household spending, high vacancy rates and voids costs will act as a drag on growth. The split in performance between prime and secondary shopping centres is stark. While rents in prime low-yielding assets have been largely stable since 2010, poorer quality higher-yielding assets have seen continual declines, losing 23% since 2007 and dragging down the overall index. We expect the slow recovery in secondary assets to continue to inhibit growth over the next five years. Upside risks do exist, investor interest in secondary shopping centres was strong in 2013 (Arndale, Accrington by Jester Properties 11.5m/12.5%, Clarendon Sq, Hyde by LIM 12.3m/11%), meaning capital investment and intensive asset management could help turn selective underperforming assets around sooner rather than later. Retail ERV Index (2008=100) 115 Std Shop Shopping Centre Retail Warehouse Supermarket IPD Voids as a Percentage of Total Tenancies Retail Warehouses Retail warehouse rents have been largely flat since the correction in 2009, a considerable out-performance when set against the continual declines witnessed in Shopping Centres and High Streets outside of London. It has been a difficult trading environment for most key OOT retailers with the likes of Dixon s, B&Q and Homebase seeing flat sales growth in 2012 while Argos and Comet saw declines. Despite this we have still seen most of the key OOT retailers slowly increase their occupation levels in terms of store numbers and space occupied throughout the last 5 years. What bodes well for this sector is the strengthening of the housing market, which has seen price growth of 8. y/y in December on the Nationwide index and should raise demand for the big ticket items offered by most OOT retailers. Although the relationship is far from perfect, we estimate that historically a 1% rise in house price has corresponded with a 0. rise in household goods sales. Verdict forecasts retail warehouse sales growth of 2.7% per year over the next five years and increases in retail warehouse floorspace of 1. per year. Voids as a percentage of total tenancies are slowly coming in on the IPD quarterly index and remain at half the current shopping centre level. As a result we expect retail warehouses to marginally outperform shopping centres, with rental growth averaging 1. over the next five years. This will be held back by the weak performance of tertiary assets, where rents continue to decline and many units remain over-rented. Source: IPD Standard Shops Shopping Centres Retail Warehouses House Prices & Retail Sales 3 25% 2 15% 1 5% -5% -1-15% -2 Dec-1993 Dec-1994 Retail Sales: Household Goods Stores (3m MA) Nationwide House Prices Dec-1995 Dec-1996 Dec-1997 Source: Haver, Nationwide Supermarkets Dec-1998 Dec-1999 Dec-2000 Dec-2001 Dec-2002 Dec-2003 Dec-2004 Dec-2005 Dec-2006 Dec-2007 Dec-2008 Dec-2009 Dec-2010 Dec-2011 Dec-2012 Dec-2013 Research & Forecast Report H REIF Colliers International 4

5 Offices London City Offices City office net stock absorption reached 1.3m sq ft 2013, a significant increase on the 136,000 sq ft absorbed in 2012 and the momentum in occupational demand in this market is positive. The overall vacancy rate stands at 6. which has helped drive increases in IPD rents of 6.1% over the year. Our analysis of transactional rents shows a spike in rents on better quality stock as demand for this type of space intensifies. Development completions are expected to total 4.5m sq ft over the next two years, marginally above the long-term average. In theory, increases in supply should subdue the pace of rental growth as overall vacancy rates rise, however occupational demand will remain strong (forecasts for FBS growth in London are 3.3% for 2014) and over one third of the completions scheduled to come to market over the next three years are already pre-let. With this in mind we expect rental growth of on average over the next five years. West End Offices West End net stock absorption rose 6 to 0.8m sq ft in 2013, driven by strong occupational interest from the TMT sector which accounted for nearly half of total take-up. Vacancy continues to fall across the majority of sub-markets, currently averaging 4.9% with only Paddington experiencing doublefigure vacancy. Our transactional rent analysis suggests average West End rents rose 5% in 2013, with rents on better quality stock averaging an 11% increase. Development completions total 3m sq ft over the next two years with much of this new stock located in Euston, Kings Cross and Victoria. Increases in supply will marginally raise the vacancy rate in selected sub-markets, but availability will fall quickly as new supply is swiftly absorbed (employment growth forecasts average 3.7% for the TMT sector alone in 2014). Tight supply conditions and robust demand mean we expect rental growth of 7% this year, which we expect to average in the region of 6.1% over the next five years M25 & South Eastern Offices Office markets in the rest of London are active. Annual take-up in the combined North and South M25 rose 4 to reach 2.5m sq ft in 2013, the highest level since Take-up in the Thames Valley fell 1. Rest of London rents on the IPD index rose 3.5% in 2013 while South Eastern rents rose 2.1%. A dwindling supply of Grade-A product has driven much larger increases in prime headline rents in selected locations; including 2 growth in Hammersmith, 1 in Uxbridge and 13% in Richmond. The outlook for demand is positive, with forecasts for FBS employment growth of 3% in 2014 and an average of over the next five years, which bodes well for business expansion and positive net stock absorption. The overall vacancy rate stands at 16.5% in the M25 and 15% in the Thames Valley, but this hides wide divergences between locations and quality of space. Locations, such as Hammersmith, will see continued rental Office Forecast Summary growth due to the shortage of quality space while locations such as Bracknell and Croydon, which have an abundance of good-quality stock, are seeing tentative movement in rents as demand increases from cost-conscious occupiers concerned about per-employee overheads. We expect positive net-stock absorption, steady falls in vacancy rates and average rental growth over the next five years of 4. in rest of London offices and 3. in South Eastern offices. Rest of UK Offices Office rents in the rest of the UK recovered in the second half of the year on the IPD monthly index to end the year exactly where they started. Vacancy rates in most of the regional centres except Leeds remain elevated, even for Grade-A stock. Transactional rent analysis suggests the main regional markets are becoming even more polarised; good quality secondary rents are beginning to rise (supported by falling vacancy rates), while average rents are flat/declining, dragged down by declining rents on poorer quality stock. It is worth noting, however, that the rate of decline abated in Speculative completions scheduled for the next 3 years are well below their historical averages in nearly all major markets except Glasgow. Birmingham has nothing in the pipeline. Meanwhile forecasts for FBS employment are robust, averaging 2. in 2014, while areas such as Manchester have additional growth from the emerging TMT sector. It will take a little while for existing vacancy to be absorbed, although when considering average historical take-up levels, existing Grade-A vacancy equates to only two years of supply (nine months in Leeds). Office Vacancy Rates Thames Valley South M25 Q1 07 Q1 08 Q1 09 Q1 10 Q1 11 Q1 12 Q1 13 Source: Colliers International North M25 Central London ERV Growth (% pa) Equivalent Yield (% eop) (2018) Capital Growth (% pa) Total Return (% pa) Research & Forecast Report H REIF Colliers International

6 With this in mind, our rental growth forecasts are 1.3% for 2014 and average 2.7% over the next five years as growth accelerates once existing availability is absorbed. Industrial Standard Industrial and Distribution Warehouses Exports continue to disappoint on the official figures, but the UK manufacturing PMI showed UK manufacturers recorded their ninth straight month of output growth in December. New orders rose for the tenth consecutive month, indicating momentum should carry forward into this year and manufacturing and exports should show a positive contribution to UK GDP. Manufacturers are reporting increased demand from Brazil, China, Ireland, Russia and the USA. Orientating exports towards faster-growing economies is a smart move in the long-term, but demand from the Eurozone, the UK s largest export partner, will be key to short-term export growth. Economic prospects in the Eurozone have improved; GDP is forecast to grow by 1.3% this year, with Germany (the UK s second largest trade partner) leading the recovery. Activity has been recently driven by budget retailers from the grocery sector (Aldi, Lidl) and non-food retailers (BM Bargains and Poundland), who continue to expand their distribution networks to support their growing store portfolios. We expect demand from this sector to continue to grow. Poundland stated late last year it is looking to double its store portfolio to 1000 over time. Figures from Kantar WorldPanel report Aldi, which currently has about 500 stores, reported sales growth of 3 y/y and market share of, up from 3% in Demand will also be supported by the e-commerce sector as non-store retailing retail sales growth continues to grow at a dramatic pace (2 y/y in Dec 13). Selected regions (NW, WM, SW) will also benefit from the pick-up in the automotive sector, the West Midlands is already seeing increased demand from the wider supply chain to Jaguar Land Rover. On the supply side there is already an urgent need for more stock in and around London and the South East, while design and build is already the dominant route for satisfying national requirements above 100,000 sq ft. We expect rental growth to accelerate to 1.5% in 2014 and average 2.5% over the next five years. Regional Development Pipeline Birmingham Bristol Leeds Manchester Edinburgh Glasgow Source: Colliers International UK s Top Export Markets (2013) Source: ONS MILLION SQ FT 10 year avg annual completions Spec pipeline United States Germany Netherlands France Irish Republic Belgium & Luxembourg China Spain Italy NATIONAL INVESTMENT André James andre.james@colliers.com FUND MANAGEMENT Nigel Holroyd nigel.holroyd@colliers.com VALUATION Russell Francis russell.francis@colliers.com Switzerland Russia India Brazil RESEARCH & FORECASTING Gavin Noblett gavin.noblett@colliers.com Logistics & Industrial Forecast Summary ERV Growth (% pa) Equivalent Yield (% eop) (2018) Capital Growth (% pa) Total Return (% pa) This report gives information based primarily on Colliers International data, which may be 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 conclusions contained in this report and they must not be relied on for investment or any other purposes. This report does not constitute and must not be treated as investment or valuation advice or an offer to buy or sell property. (Feb 2014) 2014 Colliers International. Colliers International is the licensed trading name of Colliers International Property Advisers UK LLP which is a limited liability partnership registered in England and Wales with registered number OC Our registered office is at 50 George Street, London W1U 7GA Research & Forecast Report H REIF Colliers International