Bristol Planning Policy and Law Conference Ben Burston Head of Office Research, JLL November 2014
Key Messages UK recovery broad based and on firm foundations A stand-out performer in global context Risks to the global outlook portend potential slowdown, not crisis Rebalancing in composition of growth, and the labour market Solid outlook for the Big 6 Beyond the Big 6: growth picture far less even The urban tendency and its implications Office demand is strengthening, exposing a shortfall of new supply: expect rental growth in 2015 Global search for yield: weight of money targeting commercial property and infrastructure investment 1
Strong GDP growth outlook 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% United Kingdom United States Japan Eurozone 2014 2014-18 average Source: Oxford Economics 2
Surging employment growth Total UK employment growth 2% 1% 0% -1% -2% 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 3
Focus on London. Historic and forecast employment growth 5% Greater London total employment growth 125 FBS employment growth: global cities London 4% 120 Hong Kong 3% 115 Tokyo 2% 110 New York 1% 0% 105 Frankfurt Paris Madrid -1% 100-2% 95-3% 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 90 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Oxford Economics 4
House price growth has been concentrated Average house price growth by region 150 Greater London 140 130 120 South East Eastern 110 100 90 80 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 East Midlands Eastern Greater London North East North West (GOR) Scotland South East South West Wales West Midlands Yorkshire & Humberside 5
.but current growth burst is across a broad regional base Regional PMIs Latest PMI score 65 60 55 50 45 40 2008 2009 2010 2011 2012 2013 2014 PMI - Business activity London PMI - Business activity UK North East 64.8 South West 59.4 East of England 58.9 Wales 59.3 London 58.4 East Midlands 58.4 Yorkshire 58.1 UK overall 58.0 South East 58.0 North West 57.8 West Midlands 57.6 Scotland 55.9 6
Rate rises off the table for now 6% 5% 4% 3% 2% 1% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Bank rate CPI inflation rate Source: Oxford Economics 7
Borrowing costs down: competitive tension on quality assets 7% 6% 5% 4% 3% 2.3% 1.5% 2% 1% 1.7% 2.2% 0% 2007 2008 2009 2010 2011 2012 2013 Q2 2014 Five year swap Margin All-in cost of borrowing Source: Datastream, JLL 8
Key Messages UK recovery broad based and on firm foundations A stand-out performer in global context Risks to the global outlook portend potential slowdown, not crisis Rebalancing in composition of growth, and the labour market Solid outlook for the Big 6 Beyond the Big 6: growth picture far less even The urban tendency and its implications Office demand is strengthening, exposing a shortfall of new supply: expect rental growth in 2015 Global search for yield: weight of money targeting commercial property and infrastructure investment 9
Deflation in the eurozone? 6.0 % 5.0 4.0 3.0 2.0 1.0 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Oxford Economics Inflation Interest rates 10
Downside risk has risen. Probability Upside 10% ( ) Central 60% (-) Downside 30% ( ) Economy Eurozone turnaround Slow steady recovery Eurozone stagnation Real Estate Impact Rents Yields Rents Yields - Rents - Yields Source: Oxford Economics 11
.but base case outlook is still for gradual recovery 8 6 Forecast 4 2 0-2 -4-6 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 UK World Eurozone Source: Oxford Economics 12
Stubbornly high fiscal deficits 2 0-2 -4-6 -8-10 -12 Belgium Czech Republic Finland France Germany Hungary Ireland Italy Netherlands Poland 2013 2014 Spain Sweden UK Eurozone European Union Turkey Russia Source: Oxford Economics 13
Stubbornly low wage growth 10% 8% 6% 4% 2% 0% -2% -4% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Real Wage Growth Wage Growth Inflation Source: Datastream 14
Key Messages UK recovery broad based and on firm foundations A stand-out performer in global context Risks to the global outlook portend potential slowdown, not crisis Rebalancing in composition of growth, and the labour market Solid outlook for the Big 6 Beyond the Big 6: growth picture far less even The urban tendency and its implications Office demand is strengthening, exposing a shortfall of new supply: expect rental growth in 2015 Global search for yield: weight of money targeting commercial property and infrastructure investment 15
A healthy rebalancing underway Composition of growth GDP and major components 10% 8% 6% 4% 2% 0% -2% GDP Consumption - private Consumption - government Exports Business investment 2013 2014 2015 Source: Oxford Economics 16
Employment is also rebalancing UK office employment forecast growth by sector 15% 10% 5% 8% 15% 14% 13% 0% -1% -5% -15% -10% -15% Total Source: Oxford Economics Professional, scientific and technical Administrative and support Information and communication Total growth 2014-18 Financial and insurance Public administration and defence 17
Sectoral shares point to regional differences Share of office employment in P,S&T or I&C Edinburgh 40.9% Leeds 39.7% Manchester 36.1% Bristol 36.0% Birmingham 30.4% Glasgow 27.5% Share of office employment in public administration Birmingham 18.6% Glasgow 15.2% Bristol 12.7% Manchester 12.7% Leeds 12.4% Edinburgh 11.8% 18
Faster growth in cities with favourable sectoral mix Forecast output growth (GVA) for selected cities 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Manchester Edinburgh Bristol Leeds Glasgow Birmingham Avg GVA 2014-18 Avg office employment growth 2014-18 Source: Oxford Economics 19
Key Messages UK recovery broad based and on firm foundations A stand-out performer in global context Risks to the global outlook portend potential slowdown, not crisis Rebalancing in composition of growth, and the labour market Solid outlook for the Big 6 Beyond the Big 6: growth picture far less even The urban tendency and its implications Office demand is strengthening, exposing a shortfall of new supply: expect rental growth in 2015 Global search for yield: weight of money targeting commercial property and infrastructure investment 20
Beyond the Big 6: Fastest population growth Average population growth 2014-19 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% MILTON KEYNES NORTHAMPTON EDINBURGH CAMBRIDGE SWINDON NOTTINGHAM YORK LUTON BOURNEMOUTH BRISTOL BRADFORD NORWICH READING LEEDS ABERDEEN SOUTHAMPTON OXFORD SHEFFIELD WAKEFIELD MANCHESTER BIRMINGHAM COVENTRY WARRINGTON DERBY PORTSMOUTH NEWCASTLE BELFAST SOLIHULL PLYMOUTH GLASGOW BRIGHTON CARDIFF LIVERPOOL LEICESTER DUDLEY DUNDEE HULL SWANSEA WOLVERHAMPTON STOKE SUNDERLAND WALSALL Source: Oxford Economics 21
Beyond the Big 6: Fastest employment growth Average total employment growth 2014-19 Total Employment Growth 2.40% 2.20% 2.00% 1.80% 1.60% 1.40% SWANSEA WOLVERHAMPTON SUNDERLAND DUDLEY LEICESTER WALSALL WAKEFIELD BRADFORD COVENTRY SHEFFIELD HULL DUNDEE STOKE MANCHESTER BOURNEMOUTH BELFAST YORK DERBY NORWICH LIVERPOOL CARDIFF PLYMOUTH SOUTHAMPTON LUTON NOTTINGHAM GLASGOW NEWCASTLE BIRMINGHAM PORTSMOUTH SOLIHULL CAMBRIDGE BRISTOL SWINDON BRIGHTON OXFORD LEEDS EDINBURGH MILTON KEYNES READING NORTHAMPTON 1.20% -0.20% 0.00% 0.20% 0.40% 0.60% 0.80% 1.00% 1.20% 1.40% 1.60% Office Based Employment Growth Source: Oxford Economics 22
Key Messages UK recovery broad based and on firm foundations A stand-out performer in global context Risks to the global outlook portend potential slowdown, not crisis Rebalancing in composition of growth, and the labour market Solid outlook for the Big 6 Beyond the Big 6: growth picture far less even The urban tendency and its implications Office demand is strengthening, exposing a shortfall of new supply: expect rental growth in 2015 Global search for yield: weight of money targeting commercial property and infrastructure investment 23
Corporate demand is urbanising BCO survey which locations are expected to see increasing or decreasing demand? 100% 80% 60% 40% 20% 0% Low and zero carbon offices Refurbishment of existing offices Mixed use developments City centre locations Open plan offices Hub/incubator space High rise developments Conversion of other building types into offices Business parks Cellular offices Decrease Same Increase Source: BCO, 2011 24
Key drivers Demography & lifestyle Young skilled workers tend to live in central locations Sustainability Urban locations support sustainable transport patterns Immigration & globalisation International workforce drawn to cities Policy Government continues to restrict out of town development Working practices Rise of flexible & mobile working Transport improvements New Infrastructure will bolster cities 25
How young Manchester is changing. And particularly among under 35s 26
Some recent market trends London Major Regional Cities Smaller Cities Growth of Central London Increasing residential population in centre Decentralising jobs Major developments in former fringes Office development expands core Loss of employment to larger centres Reurbanisation of Inner London Centralisation of employment Significant exceptions (Brighton, York, Bath) 27
Splitting the field: SMALLER Cambridge Swindon Solihull Derby Bath Oxford Warrington Brighton Norwich Warwick, Southampton, Coventry HIGHER GROWTH Milton Keynes Reading Aberdeen Manchester Edinburgh Nottingham Bristol Leeds, Glasgow, Birmingham York Portsmouth Leicester Exeter Plymouth Dundee Swansea Bradford Liverpool Sheffield Newcastle Belfast Cardiff LARGER LOWER GROWTH 28
Key Messages UK recovery broad based and on firm foundations A stand-out performer in global context Risks to the global outlook portend potential slowdown, not crisis Rebalancing in composition of growth, and the labour market Solid outlook for the Big 6 Beyond the Big 6: growth picture far less even The urban tendency and its implications Office demand is strengthening, exposing a shortfall of new supply: expect rental growth in 2015 Global search for yield: weight of money targeting commercial property and infrastructure investment 29
Office take-up on the rise Office take-up (000s sq ft) Big 6 Bristol 6,000 1,200 5,000 1,000 4,000 800 3,000 600 2,000 400 1,000 200 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Take-up 5 year average Take-up 5 Year Average Source: JLL, 2014 30
More pronounced downward trend for Grade A 7% 6% 5% 4% 3% 2% 1% Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Birmingham Edinburgh Leeds Manchester Source: JLL, 2014 31
Big 6 Speculative Development Pipeline 3,000 2,500 000's sq ft 2,000 1,500 1,000 500 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Completed U/C Definite Spec Start Likely Spec Start 50/50 Spec Start Source: JLL, 2014 32
Bristol Speculative Development Q3 2014 350 300 250 000's sq ft 200 150 100 50 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Completed U/C Definite Spec Start Likely Spec Start 50/50 Spec Start Source: JLL, 2014 33
Prime Rental Forecasts per sq ft 35.00 32.50 30.00 27.50 25.00 22.50 20.00 17.50 15.00 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F 2016F 2017F 2018F Birmingham Leeds Manchester Bristol Source: JLL, 2014 34
Key Messages UK recovery broad based and on firm foundations A stand-out performer in global context Risks to the global outlook portend potential slowdown, not crisis Rebalancing in composition of growth, and the labour market Solid outlook for the Big 6 Beyond the Big 6: growth picture far less even The urban tendency and its implications Office demand is strengthening, exposing a shortfall of new supply: expect rental growth in 2015 Global search for yield: weight of money targeting commercial property and infrastructure investment 35
Rapid growth in commercial real estate investment Investment volumes by sector, 4Q rolling average ( bn) bn 9 8 Industrial Office Retail 7 6 5 Alternatives have risen from 9% market share in 2010 to 20% in 9M 14 9M14 Alternatives now account xx% of the market from xx in 2012 9M 14: + 21% YoY 4 3 2 9M 14: + 29% YoY 9M 14: + 29% YoY 1 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: JLL 36
Growing AUM Massive requirement if fund allocations rise Pension Fund allocations to Real Estate 2013 14% 12% Additional investment required to reach same 11% allocation: $140bn $84bn $38bn $29bn $1.6trn $248bn $11bn 11% 14% 10% 8% 6% 4% 2% 0% 0% 1% Japan Govt PF NBIM 3% UK autoenrolment DC PFs 4% NPS 6% P7 PF sector* 6% US Public PFs 7% Calpers Europe's 10 Largest PF RE investors CPPIB * Tower Watson P7 are the seven largest PF countries: Australia, Canada, Japan, Netherlands, Switerland, UK and US Source: Tower Watson, IPD, Calpers, NBOM, NPS, CPPIB, ONS, Business Monitor MQ5, Cass Business School, IPF 37
Boost in demand for regions sees prime yields tighten 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% Jun-09 Mar-10 Dec-10 Sep-11 Jun-12 Mar-13 Dec-13 Sep-14 City of London West End Regional M25 towns Regional cities Source: JLL 38
Prime capital value history Movements in capital values London vs regional cities (Index, Q1 2000 = 100) 250 200 150 100 50 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 City of London West End Glasgow Manchester Source: JLL, 2014 39
Final thoughts and issues to watch Base case outlook is for solid, broad-based growth, but uneven pattern will continue Enough commercial space, but the wrong kind, and in the wrong place: need more new homes and more new supply in the places people want to be A new government should: - Harness surging equity for infrastructure and PRS - Spur on organic growth - Unlock housing supply 40
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