BMI View : Low commodity prices and inflation CPI of 0.0% in Q215 should sustain the robust economy in the UK over the remainder of 2015 and into 2016. The tertiary sector remains the strongest contributor, at 78% of GDP, a factor we expect to remain resilient, despite current external market volatility, as consumer spending and domestic demand drive retail and office opportunities over the forecast period.
Domestic demand is expected to remain strong: higher wages coupled with the temporary effects of low inflation have influenced consumer confidence in the short term, and should see sustained levels in the forecast period. We can attribute long-term economic stability to the rise of oil and energy production, which have raised the GDP 0.7% Q215 to a figure of 2.7% y-o-y, after a brief slowdown in Q115 attributed to the volatility in the external economic environment. Eurozone difficulties with Greece's bailout terms and continued sliding of the Chinese stock market is weighing in on investor confidence. Although, there remains uncertainty as a stronger pound becomes an issue for UK exporters, especially when trying to sell to the struggling EU. Concerning the effects to the wider commercial real estate industry up to the 2019 forecast period, we little effect on the growing industry as conditions remain favourable in the UK, such as reduced corporate tax policies, with particular opportunities in London amid the conservative majority victory in May 2015, inducing increased business sentiment.
Company focus is on London city, the most important in the region with a global financial centre and a population of over 8mn people. It is the most urbanised zone and biggest metropolitan region in the UK with a large concentration of tertiary sector businesses centred here. Although, further instability in the services sector from dwindling external markets and the 2008 financial crisis still bear scars, companies have looked for opportunities elsewhere. Increased attention is on Manchester, arguably the second most important city and the first historically to become industrialised, it has become favourable compared to other geographies due to greater potential yields and higher rental trend among all three sub-sectors. The annual growth of business stock, at around 5%, represents this interest and maintains robust demand. The importance of cities to diversify their respective industries is imperative to sustain economic development; and this has led to business interest in the northern city of Glasgow. Once considered one of the most prolific manufacturing locations in the UK, with dominant export industries such as shipbuilding and engineering, it has adopted a shift common among UK cities towards the tertiary sector; and has led to major developments in blue chip financial sector companies. Rentals here for each sector remained consistently lower that the other cities over recent years and we expect this trend to continue over the forecast period. Attractive prospects in the city will relate to the available space for development, in comparison to London and Manchester.
Contemporary corporate interest remains heavily involved with Office real estate. The UK's exports of financial and business related ventures have contributed greatly towards the country's economy and effectively attracted continued foreign and domestic interest. This is largely due to London's reputation as a global financial hub, with significant involvement in international commerce that has led the services, and hence influenced office real estate, to become the dominant sector in the UK. Although, with the economic instability in the EU and China affecting this industry, current trends reveal non-domicile companies are looking beyond London, and the equally lucrative South-East, for higher yielding opportunities in other regional locations, such as Manchester and Glasgow.
Retail sector growth has been the most promising from the three sub-sectors and remained fairly resilient, despite the Q115 economic slowdown. Occupier focus is primarily on London, with European investors continuing to absorb the available space in the market. Rentals will see an upward trend as a result of further robust demand, with rising acquisitions of prime retail space expected in 2016. Current employment levels are likely to continue a downward trend at 5.6% y-o-y inQ215, from 6.5% in the previous year, coupled with rising wages will boost household spending and support the retail sector further into the forecast period, spurring business confidence and providing opportunities in the market.
It is important to note performance is currently mixed among the UK sectors, so we have contemplated the industrial real estate industry as the underperformer for the remainder of 2015 and into 2016, due to manufacturing encountering a turbulent period with output experiencing its lowest output in two years at a 0.3% decline, and lagging exports influenced by a stronger pound. We therefore expect this sector to maintain current rates, with a risk of possible downward pressure on rentals attributed to lack of demand in areas outside London.
Overall, significant expansion in the supply of commercial space in the capital over the last few years has started to weigh on rental rate growth, which has started to plateau. Meanwhile, speculative inflows from foreign investors into the market forced asset prices higher, reducing rental yields. We note the increasing regionalisation of the UK commercial real estate sector as firms look to diversify rental and investment activity away from the capital to try reduce costs.