BMI View : The UK economy has managed to beat market expectations of a precipitous fall in growth since the EU referendum result, with a steady performance of 0.5% for the three months following the vote- supported by the strong performance in the services sector. However overall growth has been undermined by contractions in the construction and industrial based industries. Uncertainty is shadowing the UK market, and it is not clear whether the nation can continue with stable growth. Commercial real estate will come under pressure as a result, but for now, we see the lack of quality space and moderate demand in the market keeping rentals in check for 2017, with some marginal growth in rates expected.
The UK has performed commendably since the European Union (EU) referendum vote in June16, highlighted by the 0.5% growth recorded in the three months after the vote to leave the EU. Furthermore, the UK unemployment rate declined to 4.8% in the same period, the figure beat market expectations and hit a new 11-year low, highlighted by the Prime Minister, Theresa May, as the UK's 'resilience' to market uncertainty. However, growth has been fundamentally supported by favourable performance in the services sector, a result of good levels of consumer spending on the back of a fall in value of the Sterling, whilst construction, manufacturing and industrial production have all witnessed contractions following the vote.
Uncertainty surrounding the UK economy is expected to be a prevalent theme for the next two years, at least, whilst the government negotiates on terms of the Brexit. This is expected to significantly undermine business confidence and investment, with the sentiment already influencing the broader commercial property market. London will remain the key out-player in our forecast, rentals will continue to be highest here as activity remains fairly strong considering the reputation here as a global city leader, whilst Glasgow and Manchester will feel the strain of falling development activity and moderate demand. Nevertheless, despite sluggish growth and uncertainty plaguing the market, limited supply of quality space and robust demand should keep rentals stable across the market; the exception being London where all sub-sectors are expected to see marginal growth in rates for 2017.
The office sub-sector will maintain current upward trend across London, Glasgow and Manchester, supported by strong performances in the services sector. The rising importance of the tech industry will play a key part in maintaining momentum in the office sub-sector, however this could be undermined by the lack of access to the EU single market. Banking & Financial companies will comprise the majority of demand, despite some flight of some institutions to the EU to avoid turbulence from Brexit. Lack of quality premises is driving rentals, and we believe there will be marginal rises in rates over 2017.
Retail is where we hold most optimism, the spike in spending shows the resiliency of the sector to the vote, indicated by the y-o-y increase in retail sales for July-September16 standing at 5.2%, a 0.9% rise from 4.3% witnessed over the same period in 2015. We attribute better spending figures to the fall in value of the Sterling, which has influenced higher footfalls of foreign tourists on the back of a weaker currency. Domestic consumption remains robust as well, UK shop prices have continued to decline since the vote, despite contentious issues between suppliers and retail distributors - 'Marmitegate' (the price dispute between Tesco and Unilever over Marmite) - which supports local spending. With the rising demand and lack of quality space, all three cities in our forecast are expected to witness marginal inclines in rentals for prime units over 2017.
Industrial real estate will also perform admirably, as the demand stemming from e-commerce and retailers rises in line with increased spending. In manufacturing, the industry is thought to have come back into line with 'business as usual', after a massive growth spike in output in Q216, +1.6% q-o-q, rather than the industry reducing production in light of the referendum result- which will keep rentals stable. Additionally, the drop in currency value is helping the export industry considerably, as many of the FTSE100 export-orientated companies operate in dollars. Although imports will become more expensive, and the uncertainty over the EU trade agreement might further impact importers- influencing rising prices which will likely transfer over to the consumer. Overall, we consider the industrial sub-sector to remain robust and see stability in rentals over 2017, supported by rising demand for bespoke units and lack of suitable supply.
Future performance in commercial real estate will be dependent on the success of the agreements made in the aftermath of the invoking of 'Article 50' - starting the leaving process for the UK from the EU- and specifically the trade agreements that will underpin the ability of the UK economy to continue with growth. This is concerning for the economy going forward, as it is not clear whether the stable performance in real growth can continue post-Brexit. Uncertainty will shadow the market for the next few years, whilst negotiations take place, and are likely to further impact sentiment into the UK commercial market. Investment opportunities will be apparent across all three sub-sectors, although this is focused on the London market- seen as a 'safe haven' during such volatile market activity. We advise vigilance when considering the UK market for 2017, as many investors adopt a wait-and-see approach that could affect prices, going forward.
The United Kingdom Real Estate Report features BMI Research's market assessment and independent forecasts of major construction projects in the residential and commercial markets, plus rental prices and yields in major cities. The report critically analyses the prospects for real estate within the broader economic and financial context - both domestic and global - via our econometrically-modelled and clearly explained banking and economic forecasts and follows this through to evaluate the implications for REITs.
BMI's United Kingdom Real Estate Report provides industry professionals and strategists, sector analysts, business investors, trade associations and regulatory bodies with independent forecasts and competitive intelligence on the real estate industry in United Kingdom.
- Benchmark BMI's independent real estate industry forecasts for United Kingdom to test other views - a key input for successful budgeting and strategic business planning in the British real estate market.
- Target business opportunities and risks in United Kingdom through our reviews of latest industry trends, regulatory changes and major deals, projects and investments.
- Assess the activities, strategy and market position of your competitors, partners and clients via our company profiles (inc. SWOTs, KPIs and latest activity).
BMI Industry View
Summary of BMI’s key industry forecasts, views and trend analysis covering real estate and construction, regulatory changes, major investments and projects and significant national and multinational company developments.
Industry SWOT Analysis
Analysis of the major Strengths, Weaknesses, Opportunities and Threats within the real estate sector and within the broader political, financial, economic and business environment.
Industry Forecasts Outlook
Historic data series (2010-2013) and forecasts to end-2019 for the domestic real estate industry and for the local and global finance industry.
- Real Estate: Office, retail and industrial real estate yields for all major cities (%); short term forecasts on minimum and maximum real estate rental prices by sub-sector (USD per square metre and local currency per square metre).
- Construction: Industry value (USDbn); contribution to GDP (%); employment (‘000); real growth (%).
- economy: Economic growth (%); nominal GDP (USDbn); unemployment (%); interest rates (%); exchange rate (against USD).
BMI’s Real Estate Risk Reward Index
BMI’s Risk Reward Indices provide investors (real estate vendors, construction companies and financial investors) looking for opportunities in the region with a clear country comparative assessment of a market’s risks and potential rewards. Each of the country markets are scored using a sophisticated model that includes more than 40 industry, economic and demographic data points to provide an indices of highest to lowest appeal to investors, with each position explained.
Overview of the real estate sector, including analysis of existing/planned real estate developments and emerging industry trends in the office, industrial and commercial sectors
Features detailed city-level data and analysis on rental prices, yields, contract terms and real estate availability with separate chapters covering the office, retail and industrial sub-sectors.
Examines the competitive positioning and short- to medium-term business strategies of key industry players. Strategy is examined within the context of BMI’s industry forecasts, our macroeconomic views and our understanding of the wider competitive landscape to generate Company SWOT analyses. The latest financial and operating statistics and key company developments are also incorporated within the company profiles, enabling a full evaluation of recent company performance and future growth prospects.
*Company profiles are not available for every country. Those reports instead contain information on the current activities of prominent companies operating in the market.