Investment Property Forum UK Consensus Forecasts

Transcription

1 Investment Property Forum UK Consensus Forecasts AUGUST 2015 SUMMARY REPORT This research was commissioned by the IPF Research Programme

2 UK Consensus Forecasts This research was funded and commissioned through the IPF Research Programme This Programme supports the IPF s wider goals of enhancing the understanding and efficiency of property as an investment. The initiative provides the UK property investment market with the ability to deliver substantial, objective and high-quality analysis on a structured basis. It encourages the whole industry to engage with other financial markets, the wider business community and government on a range of complementary issues. The Programme is funded by a cross-section of businesses, representing key market participants. The IPF gratefully acknowledges the support of these contributing organisations:

3 UK Consensus Forecasts 1 Survey of Independent Forecasts for UK Commercial Property Investment August and 2016 projections have broadly improved over the last three months and the consensus for the current year is a total return of 13.9% for All Property. A combination of stronger rental growth and, more influentially, increasing capital value growth are driving this improved optimism. However, the outlook for the later years of the survey period remains very subdued with income return being the primary source of performance. Key points 2015 expectations broadly strengthen further The weak sentiment previously expressed by forecasters for retail markets remains relatively constant but, in contrast, 2015 rental growth expectations for the office and industrial sectors have risen further over the quarter, to average 7.8% and 3.8% respectively (from 6.9% and 3.4% in May). The impact of these improvements has caused the All Property forecast to rise to 3.8% (from 3.5% last quarter). With the sustained appetite for further investment, forecasts for capital growth have risen for all sectors other than Retail Warehouses over the last three months. Average Office capital value growth rates of 13.0% and 9.4% for Industrials are the key contributors to an All Property average growth rate of 8.5% (previously 7.6%). The range of 2015 total returns projections varies between 9.7% for retail warehousing (down again quarter-on-quarter, from 10.6%, as rental and capital value growth forecasts have continued to weaken) to 17.9% for Offices (up from May s 15.9%), leading to an All Property total return average of 13.9%. Pattern of weaker performance in later years maintained Whilst forecast rental growth rates in 2016 average 3.3% at the All Property level, broadly in line with the long-run average, expectations for the remaining years of the survey period are weak, despite underlying average forecasts holding or improving modestly for most sectors in 2018 and 2019, at 2.2% and 1.7% respectively. Weaker capital value growth projections from 2017 drive down the All Property average to 0.1% that year (from 0.4% in May), as Offices are expected to grow by only 0.3% and the three retail sector growth rates fall below zero. All sectors are expected to deliver negative growth in the final year of the survey period, with 2019 average capital value growth rates potentially ranging between -1.8% for Offices to -0.1% for Retail Warehouses to produce an All Property average of -0.7%. The implication for total returns is clear: whilst 2016 s prediction is 9.2%, this overall measure of performance is expected to fall significantly in 2017, to below 5.0%. Whilst a slight recovery in capital growth rates the following year lifts the estimated All Property figure to 5.2%, in the final year of the forecast period negative capital value growth is likely to reduce the 2019 total return to around 4.3%. Five-year averages reflect near-term improvements Improved rental and capital value growth forecasts in 2015 and 2016 have increased the respective five-year annualised averages to for All Property, currently standing at 2.7% and 2.4% respectively, despite weakening capital growth forecasts in later forecast years. At the total return level, weaker retail capital growth forecasts in the final years of the survey period and lower implied income returns combine to produce an All Property projected annualised average of 7.4% (compared to 7.5% three months ago).

4 2 UK Consensus Forecasts Economic background The UK economy continued to expand in the three months to the end of June The Office for National Statistics (ONS) second estimate 1 confirmed its preliminary report of 0.7% growth in gross domestic product (GDP) volume in Quarter 2 (April to June), compared with an increase of 0.4% in Q1. The principal drivers of growth were services and production, at 0.7% and 1% respectively, contrasting with a decrease of 0.7% in agriculture, forestry and fishing. Within production, output from mining and quarrying, including oil and gas extraction, rose by 6.1% but manufacturing (the largest component) decreased by 0.3% (the first negative growth recorded for this element since Q1 2013). Construction output increased by 0.2% in Q2 (a 0.2 % upward revision from the previous preliminary estimate). Turning to public sector finances, a surplus of 1.3 billion of income over expenditure was recorded in July 2, due to income tax receipts, VAT, national insurance contributions and corporation tax being some 4% higher than in July Annual borrowing has broadly fallen since peaking in In the current financial year (April to July 2015), the public sector has borrowed 24.0 billion, being 7.3 billion lower than at the same point in the previous financial year. Public sector net debt has increased to 1,505.3 billion, representing 80.8% of GDP at the end of July 2015, up from 1,487.7 billion (80.4% of GDP) at the end of April The Office for Budget Responsibility estimates the public sector will borrow 69.5 billion during the financial year ending March On the inflation front, the Consumer Prices Index (CPI) 3 grew by 0.1% in the year to July 2015, up from 0.0% in June. The main contributor to this change was a smaller than expected annual fall in clothing prices compared with a year ago to offset a 6.6% rise in transport services and 0.2% increase in recreation and culture, although falling prices for food and non-alcoholic beverages also helped to arrest the increase. The latest Bank of England inflation report 4 identified food, energy and other goods, as well as weak growth in domestic costs, as the causes of the current low inflation rate; recent falls in energy prices will continue to have a negative impact at least until mid With GDP expected to maintain its historic average rate of growth, the Bank continues to project a rise to the target inflation rate of 2% by the middle of This assumes the Bank will not be required to take any evasive action but is conditional on a gradual rise in Bank Rate. At its August meeting, the Monetary Policy Committee (MPC) voted by a majority of 8 to 1 to maintain Bank Rate at 0.5%, reflecting concerns over unemployment (still above its long-run sustainable rate) and weaker global growth, amidst fears of a Chinese slowdown and re-emergence of deflationary pressures. The latest ONS labour market release 5 recorded million people in work in the period April to June 2015, 63,000 fewer than in January to March 2015, but 354,000 more than a year earlier. Conversely, unemployment figures identified 1.85 million jobless people (5.6% of the working population), 25,000 more than for Q1 but 221,000 fewer than a year earlier. Compared to the same period last year, employee pay, including bonuses, from April to May increased by 2.4% (2.8% excluding bonuses). Finally, the latest ONS report 6 of retail sales estimated an increase of 4.2% in July compared with July 2014 (the 28th month of consecutive year-on-year growth and the longest period of sustained growth since May 2008). Average store prices, however, fell again, down 3.0% in July compared with July 2014, primarily driven by a 10.9% decrease in petrol station prices. The quantity bought increased by 0.1%, with gains in department, household goods and other stores, as well as non-store retailing. The amount spent in the retail industry in July increased by 1.0% from July 2014, but decreased by 0.2% compared with June Online sales increased by 13% in July 2015 compared with a year ago, representing 12.6% of all retail sales. 1 ONS: Gross Domestic Product:, Q Release, 28 August ONS: Public Sector Finances, July 2015 Release, 21 August ONS: Consumer Price Inflation, July 2015, 18 August Bank of England Inflation Report, 6 August ONS: UK Labour Market, August 2015, 12 August ONS: Retail Sales, July 2015, 20 August 2015

5 UK Consensus Forecasts 3 All Property rental value growth forecasts Near-term average growth projections have improved further during the current quarter, with the current year forecast almost 0.5% higher than six months ago whilst the 2016 figure has increased marginally (up 0.13% since May). % % 3.3% 2.6% 2.2% 1.7% 2.7% Predictions for the last three years of the forecast period have remained broadly constant, as a result of which the five-year average has risen slightly /19 All Property average capital value growth forecasts A continued strengthening in capital growth rates is forecast during the first two years of the survey. To date, the 2015 All Property average has improved by over 1.5% (from 7.0% in February), with the 2016 forecast also stronger (from 3.1% six months ago). Whilst predictions for the later years of the survey have declined, the improvement in near-term prospects has resulted in a further modest increase in the five-year average (from 2.3% in May and 2.1% in February). % % 4.1% 2.4% 0.1% 0.2% -0.7% /19 All Property total return forecasts % % 9.2% % 7.4% 8 4.1% 6 4.9% 5.2% 4.3% 2.4% % 5.1% 0.1% 4.9% 0.2% 5.0% 5.1% -0.7% 5.1% /19 Capital return Income return (implied) Total return In 2015, capital return remains the primary driver of overall performance. With increased growth forecast for most sectors, the predicted average All Property total return has risen by over 0.8% since May (compared to 0.6% in the previous quarter). This increased optimism extends to 2016 (previously 8.8%) but weaker growth prospects in later years begin to impact significantly. This is accentuated in 2017 by the single very negative forecast. Omitting this outlier would increase the total return to 5.6% in that year (with an adjusted capital growth rate of 0.7%). However, a general weakening in sentiment by other contributors overrides any bounce back in 2018, to produce an adjusted total return of 4.7% (as capital growth would otherwise decline to -0.2%).

6 4 UK Consensus Forecasts All Property survey results by contributor type (Forecasts in brackets are May 2015 comparisons) Property Advisors and research consultancies 12 (13) contributors Rental value growth (%) Capital value growth (%) Total return (%) / / /19 Maximum 4.8 (4.6) 4.5 (4.4) 3.5 (3.4) 9.5 (9.3) 6.4 (6.7) 4.5 (4.4) 15.0 (15.4) 11.7 (11.7) 9.7 (9.8) Minimum 3.3 (2.9) 2.3 (2.3) 2.2 (2.3) 6.9 (5.6) 1.0 (1.0) -1.1 (-0.6) 12.1 (10.9) 6.5 (6.5) 4.9 (4.9) Range 1.5 (1.7) 2.2 (2.2) 1.3 (1.1) 2.6 (3.7) 5.4 (5.7) 5.6 (5.0) 2.8 (4.5) 5.2 (5.2) 4.8 (4.9) Median 4.1 (3.6) 3.3 (3.1) 2.8 (2.9) 8.3 (7.5) 4.2 (2.9) 2.8 (2.9) 13.8 (13.0) 9.1 (8.0) 7.8 (8.2) Mean 4.1 (3.7) 3.4 (3.2) 2.9 (2.8) 8.1 (7.5) 4.0 (3.5) 2.7 (2.7) 13.5 (13.0) 9.2 (8.6) 7.9 (8.0) Fund Managers 14 (15) contributors Rental value growth (%) Capital value growth (%) Total return (%) / / /19 Maximum 4.9 (4.3) 4.7 (4.7) 3.3 (3.7) 13.4 (13.7) 6.0 (8.0) 3.5 (3.8) 18.0 (18.3) 13.0 (15.0) 8.8 (9.0) Minimum 2.3 (2.3) 1.7 (1.7) 1.1 (1.3) 6.0 (2.5) 1.9 (-0.6) -1.5 (-0.3) 11.5 (9.4) 6.2 (4.3) 3.4 (4.6) Range 2.6 (2.0) 3.0 (3.0) 2.2 (2.4) 7.4 (11.2) 4.1 (8.6) 5.0 (4.1) 6.5 (8.8) 6.8 (10.7) 5.4 (4.4) Median 3.6 (3.3) 3.2 (3.1) 2.7 (2.6) 8.8 (7.7) 4.1 (4.3) 2.5 (2.2) 14.0 (13.0) 8.9 (9.0) 7.4 (7.1) Mean 3.6 (3.3) 3.2 (3.1) 2.6 (2.5) 8.9 (7.6) 4.2 (3.8) 2.1 (2.0) 14.2 (13.0) 9.3 (8.9) 7.0 (7.0) All Forecasters 26 (30) contributors Rental value growth (%) Capital value growth (%) Total return (%) / / /19 Maximum 4.9 (4.6) 4.7 (4.7) 3.5 (3.7) 13.4 (13.7) 6.4 (8.0) 4.5 (4.4) 18.0 (18.3) 13.0 (15.0) 9.7 (9.8) Minimum 2.3 (2.3) 1.7 (1.7) 1.1 (1.3) 6.0 (2.5) 1.0 (-0.6) -1.5 (-0.6) 11.5 (9.4) 6.2 (4.3) 3.4 (4.6) Range 2.6 (2.3) 3.0 (3.0) 2.4 (2.4) 7.4 (11.2) 5.4 (8.6) 6.0 (5.0) 6.5 (8.8) 6.8 (10.7) 6.3 (5.2) Std. Dev. 0.6 (0.6) 0.7 (0.7) 0.5 (0.5) 1.5 (1.9) 1.7 (2.2) 1.5 (1.3) 1.5 (1.8) 1.8 (2.3) 1.5 (1.4) Median 3.8 (3.5) 3.3 (3.1) 2.8 (2.6) 8.5 (7.5) 4.1 (3.8) 2.7 (2.5) 13.9 (13.0) 8.9 (9.0) 7.5 (7.6) Mean 3.8 (3.5) 3.3 (3.2) 2.7 (2.6) 8.5 (7.6) 4.1 (3.7) 2.4 (2.3) 13.9 (13.0) 9.2 (8.8) 7.4 (7.5) Survey results by sector Sector summary means All sectors (no. contributors) Rental value growth (%) Capital value growth (%) Total return (%) / / /19 Office (23) Industrial (23) Standard Retail (23) Shopping Centre (23) Retail Warehouse (23) All Property (26) Notes: 1. Figures are subject to rounding and are forecasts of All Property or relevant segment Annual Index measures published by the Investment Property Databank. These measures relate to standing investments only, meaning that the effects of transaction activity, developments and certain active management initiatives are specifically excluded. 2. To qualify, all forecasts were produced no more than 12 weeks prior to the survey date. 3. Maximum: The strongest growth or return forecast in the survey under each heading. 4. Minimum: The weakest growth or return forecast in the survey under each heading. 5. Range: The difference between the maximum and minimum figures in the survey. 6. Median: The middle forecast when all observations are ranked in order. The average of the middle two forecasts is taken where there is an even number of observations. 7. Mean: The arithmetic mean of all forecasts in the survey under each heading. All views carry equal weight. 8. Standard deviation: A statistical measure of the spread of forecasts around the mean. Calculated at the All forecaster level only. 9. The sector figures are not analysed by contributor type; all figures are shown at the All forecaster level. 10. In the charts and tables, All Property figures are for 26 contributors, while the sector forecasts are for reduced samples (20/23) of contributors.

7 UK Consensus Forecasts 5 Acknowledgements The Investment Property Forum (IPF) thanks all those organisations who contributed to the IPF UK Consensus Forecasts for Q2 2015, including the following: Property advisors (including research consultancies): Bilfinger GVA, Capital Economics, CBRE, Cluttons LLP, Colliers International, Cushman & Wakefield, DTZ, Fletcher King, JLL, Paul Mitchell Real Estate Consultancy, Real Estate Forecasting Limited and The Lazarus Partnership. Fund managers: Aviva Investors, AXA Real Estate, BMO Real Estate Partners, CBRE Global Investors, Cornerstone Real Estate Advisers, Deutsche Asset & Wealth Management, HSBC Global Asset Management, Keills, Knight Frank Investment Management, LaSalle Investment Management, Legal & General Property, M&G Real Estate, Savills Investment Management and Standard Life Investment. Note Consensus forecasts further the objective of the IPF to enhance the efficiency of the real estate investment market. The IPF is extremely grateful for the continuing support of the contributors as noted above. This publication is only possible thanks to the provision of these individual forecasts. If your organisation wishes to contribute to future surveys, please contact the IPF Research Director at pcraddock@ipf.org.uk. Disclaimer The IPF Survey of Independent Forecasts for UK Property Investment is for information purposes only. The information therein is believed to be correct, but cannot be guaranteed, and the opinions expressed in it constitute our judgment as of the date of publication but are subject to change. Reliance should not be placed on the information and opinions set out therein for the purposes of any particular transaction or advice. The IPF cannot accept any liability arising from any use of the publication. Copyright The IPF makes Consensus Forecasts available to IPF members, those organisations that supply data to the forecasts and those that subscribe to them. The copyright of Consensus Forecasts belongs to, and remains with, the IPF. You are entitled to use reasonable limited extracts and/or quotes from the publication in your work, reports and publications, with an appropriate acknowledgement of the source. It is a breach of copyright for any member or organisation to reproduce and/or republish in any printed or electronic form the whole Consensus Forecasts document, or substantive parts thereof, without the prior approval of the IPF. Such approval shall be on terms at the discretion of the IPF and may be subject to the payment of a fee. Electronic copies of Consensus Forecasts may not be placed on an organisation s website, internal intranet or any other systems that widely disseminate the publication within a subscriber s organisation without the prior approval of the IPF. Such approval shall be on terms at the discretion of the IPF and may be subject to the payment of a fee. If you or your organisation wishes to use more than a reasonable extract from Consensus Forecasts or reproduce the publication, contact the IPF in the first instance. Address enquiries to the IPF Research Director at pcraddock@ipf.org.uk.

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