BMI View : With economic growth broadening out to the UK regions, we expect rental rates to grow across all three commercial real estate market sub-sectors we cover in 2016. Investors' desire to capture growth and secure higher returns should keep demand for property in which to invest high. There are still opportunities to take on development risk in the regions and suburban London.
UK economic growth slowed slightly in Q315, expanding by 0.5%, down from 0.7% in Q215. A contraction in manufacturing and construction output was the main factor in this slower growth. Meanwhile, the services sector has continued to be the key driver of economic expansion. Business confidence has increased following the decisive outcome in the May 2015 general election, ending months of uncertainty. Consumer confidence is also improving, and with unemployment continuing to trend down and inflation at zero, consumer spending has been rising. Overall, therefore, the economy looks set to post a solid performance in 2015 as a whole, with BMI forecasting growth of 2.4%. Through to 2019 we expect annual growth to average 2.4%. That said, there are downside risks to this forecast. With the Chinese economy slowing and a flurry of weak international data, the world economy seems to be losing momentum and this could hold back export growth and cut business investment in the UK.
Stable economic growth will boost the UK's commercial real estate market. The sector is very much dominated by London, given the city's population of over 8mn people and status as a global financial centre. It is the most urbanised zone and biggest metropolitan region in the UK, with a large concentration of tertiary sector businesses. Despite instability in the financial and services sector as a result of the dwindling external markets and the 2008 financial crisis, in the past three years London has seen significant recovery in both its economy and property markets. Meanwhile, demand has been rising in Manchester, which is arguably the country's second most important city and the first historically to become industrialised. The city's popularity compared to other cities is partly due to the availability of a skilled workforce and high quality accommodation at rental costs that are significant lower than London. Meanwhile, in Glasgow, once one of the UK's most important manufacturing locations, the economy has shifted towards the tertiary sector, leading to major growth in the blue chip financial sector companies with bases there. Rental values in Glasgow for each sub-sector have remained consistently lower that the other cities we cover, and we expect this to continue. However, the city has a significant amount of space available for development.
The stable economic outlook should generate higher tenant demand across all three sub-sectors and across the country. In the office market, healthy occupier sentiment is underpinning demand for space in London and key regional cities such as Manchester and Glasgow. In both London and Manchester take-up levels remained strong during 2015 and although more development is taking place, a significant proportion is pre-let and prospects for further rental growth are positive. The construction of Crossrail is likely to open up new locations in London by improving connectivity and accessibility and make areas such as Kings Cross, Farringdon and Shoreditch more attractive for potential tenants.
In the retail market, rising earnings and low inflation should continue to boost consumer spending. There has been higher leasing activity in London and key regional cities, and supply of new space is dwindling, putting upwards pressure on rents. The market is nonetheless challenging because of intense competition among retailers and particularly because of the rapid growth of online shopping. Vacancy rates are significantly lower in London, particularly central London, than nationally and we expect rents for prime assets in London and Manchester to continue to rise in 2016.
The industrial market remained robust in 2015. Supply of large warehouses is tight and diminishing due to limited speculative development. Occupiers are resorting to build-to-suit options to meet their needs. We expect demand to outstrip supply in the near term and consequently generate rental growth in 2016. In the medium term more speculative construction is expected, and this should expand the choice and quality of space available to occupiers.
The UK's investment market has remained active. UK institutions and property companies have been active, particularly in London, while overseas investors have continued to dominate the central London market, accounting for two thirds of all transactions. Overall, overseas investors have accounted for 50% of all transactions in the UK across all sub-sectors. The focus of attention for this group has been on office and retail assets in core markets, which has created intense competition, leading to rising prices and downwards pressure on yields. Industrial assets have continued to be more the domain of UK institutions and property companies, but here too there is increasing evidence of overseas players showing greater interest. On the whole, we expect the volume of investment in the UK commercial property to remain strong in 2016, although uncertainty over the outcome of the UK's referendum on possible exit from the EU could generate a degree of caution.
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.