IN BRIEF UK COMMERCIAL PROPERTY UPDATE AND OUTLOOK - September 2021 - Gerald Eve
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IN BRIEF
UK COMMERCIAL PROPERTY UPDATE AND OUTLOOK
September 2021
Read more.
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SEPTEMBER UPDATE
All Property annual rental growth was effectively
zero in August, which was the first non-negative
figure since before the pandemic in January 2020.
Retail rents edged ever closer to a floor while
exceptional industrial returns pushed All Property
annual total return to almost 12%. Read more for 0% 27.2% 6.9% 3.5% 0.9% 4.7%
the most recent occupier and investment updates, All Property annual Industrial annual 2021 GDP forecast 2021 CPI forecast 2021 10-yr bond yield 2021 unemployment
rental growth total return forecast rate forecast
economics data and property forecasts.
Read more.
UK PROPERTY SEGMENTS UK ECONOMY SPOTLIGHT OUTLOOK C O N TAC T
First non-negative rental growth
since the pandemic
All Property annual total return continued its upward march and hit Large distribution warehouse rents took a sharp step up in most All Property annual total return and components
Source: MSCI
11.6% in August. The driving factor is yield impact but rental growth locations in Q3, particularly in the south and west London prime
%
is no longer a drag. All Property annual rental growth was effectively markets where competing segments of occupier demand are
15
zero in August, which was the first non-negative figure since before set against very low vacancy. Data from the multi-let segment
the pandemic in January 2020. also show a sharp acceleration in rents at the midpoint of 2021 as 10
new entrants such as the last mile food delivery specialists seek
The improved rental trend was driven by strength in industrial coverage of urban centres, set against effectively a fixed supply. 5
and further signs of stabilisation in retail. Retail rental growth was
0
running at an annual rate of -5.2% in August and this should continue It’s not all logistics though – Blackstone recently spent £130m
to come closer to zero quite quickly over the next few months as on a 91 acre site in Broxbourne, Hertfordshire for a proposed -5
higher frequency indicators suggest minimal declines in retail rents new £700m expansion of Sunset Studios. In more traditional
in recent months. In the three months to August, high street rents fashion, EQT Exeter took Primark’s 785,000 sq ft Huntington Road -10
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fell 1.1%, shopping centres 0.3% and retail warehouses only 0.1%. distribution warehouse in Thrapston, Northamptonshire for £102m.
Income Return Yield Impact Rental Growth Total Return
Retail continues to be the least traded sector, with effectively Office investment performance still appears relatively
only retail warehouses and supermarkets featuring in investment unremarkable. Quarterly rental growth remains lacklustre while
transactions in recent months. In August Invesco acquired the the market is awash with sublet available space. Meanwhile take- Annual rental growth by sector
Source: MSCI
Fort Shopping Park in Birmingham for £84m in a joint venture with up is ticking over broadly in line with lease events while occupiers
%
George Capital. The Railways Pension fund also sold their ‘Railpen’ still deliberate over their requirements. The investment market has 6
retail warehouse portfolio to iSec for £68m, with assets across been more active, especially at the prime end. Typically activity 4
Cardiff, Scunthorpe and York. has been focussed on London but Regional REIT’s recent purchase 2
of the UK-wide 31 asset Squarestone Portfolio for £236m reflects
Industrial continues to perform robustly, with annual total return confidence in the regional office market.
0
at over 27% in August. Strong positive rental growth and yield -2
impact have worked together to generate some of the highest -4
returns on record in recent months. London multi-let and national -6
distribution warehouses continue to be the strongest performers, -8
0% 27.2%
both at around 30% annual total return in August. -10
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All Property annual rental growth Industrial annual total return All Property Retail Office Industrial
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UK PROPERT Y SEGMENTS UK ECONOMY SPOTLIGHT OUTLOOK C O N TAC T
Segments
12-month return to August 2021
Source: MSCI
%
40
30
20
10
0
-10
-20
-30
London UK distr All SE ROUK Retail All Supermarket Lon/SE All City All Midtown & Leisure ROUK ROUK SE ROUK London SE Shopping
multi-let w’house Industrial multi-let multi-let warehouse Property office parks Retail office Office WE office standard office office parks office high street high street high street centres
industrial industrial
Income return Rental growth Yield impact Total return
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UK PROPERTY SEGMENTS UK ECONOMY SPOTLIGHT OUTLOOK C O N TAC T
UK economy
6.9% 0.9%
UK GDP increased by a disappointing 0.1% between June The rate of annual CPI inflation jumped to 3.2% in August from 2%
and July. This has been put down in part to rising covid cases in July. This is still considered temporary by most commentators
and the surge in the amount of people asked to self-isolate. and includes various fuel cost increases (which will include a jump 2021 GDP forecast 2021 10-yr bond yield forecast
This stopped large numbers of people from going to work in the energy price cap in October), the hospitality VAT cut reversal
and curbed footfall in shops and restaurants. and spike in the price of global goods. Oxford Economics predicts
Retail spending was again down 1% between July and
that CPI inflation will finish 2021 at 3.5% and fall back in 2022. We are
more concerned that price rises could become more entrenched,
3.5% 4.7%
August, and 5% below the recent peak in April. The most 2021 CPI forecast 2021 unemployment rate forecast
but in either case the Bank of England is likely to tolerate this and
significant cooling in recent months has been spending on not increase the base rate until 2023 at the very earliest.
homewares, which was almost 14% lower in August than in
May. This volatility reflects the continued normalisation of The monthly monitor
spending patterns, set against the ongoing unpredictability Source: Bank of England, European Commission, IMF, ONS Two-year trend Latest figure
of covid. Online spending accounted for around a quarter of GDP annual growth 7.5%
the retail total, which is a sustained increase above the pre- Unemployment rate 4.6%
pandemic level of less than 20%. Consumer confidence edged
Consumer confidence -7.6
downwards again in August but remained comparable to figures
at the end of 2019. Retail sales growth 0.6%
Retail sales % online 25.5%
Economic commentators remain relatively bullish and predict Manf output growth 6.0%
a pickup in short term activity from the lingering impacts
Brent crude (USD/bbl) 70.75
of lifting social restrictions and less stringent rules on self-
isolation – though the major economic gains are now in the Gold (USD/oz) 1,784
past. More recent high-frequency data support this and excess FTSE100 7,120
cumulative household savings will be an enabling factor. CPI inflation 3.2%
Fiscal policy remains highly stimulatory, with most government 10-year bond yield 0.7%
support schemes to run until the autumn and some even into
EUR/GBP 1.17
March next year. The weaker-than-expected outturn for July
and escalating transportation and goods costs and shortages USD/GBP 1.38
means Oxford Economics has revised its 2021 GDP growth Two-year trend Latest figure
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forecast to 6.9%, down from 7.3% last month.
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UK PROPERTY SEGMENTS UK ECONOMY SPOTLIGHT OUTLOOK C O N TAC T
Spotlight on...
Multi-let industrial
Multi-let is the smaller end of the industrial market, with units Somewhat surprisingly then, the Q2 data suggest that the multi- ERV annual growth rates
Source: MSCI, Gerald Eve
characterised in Gerald Eve’s unique and detailed syndicated let void rate in London & the South East moved above that of
study as being between 500 – 50,000 sq ft. Much like their big the regions outside of the South East for the first time on record.
%
7
box logistics brethren, multi-let market rents have accelerated The driver appears to be the larger mid box multi-let units in Inner
6
again so far in 2021 after a strong finish to 2020. London and London. This could reflect affordability and substitutability factors.
the South East rental growth has been particularly bullish, and While tenants in the smaller space that operate on very short notice 5
incentives and underrentedness here have also continued to delivery functions need to be in this geography, larger generalised 4
trend downwards, which means the passing rents tenants pay storage and distribution functions could potentially be operated 3
have accelerated even faster than headline market rents. from a less central location at much-reduced cost. In the current 2
market, landlords will be more comfortable to take a void and hold 1
The footprint of logistics occupiers continues to grow strongly, out for the right tenant and/or the highest headline rent, or indeed
particularly in the larger multi-let units in Greater London where an angle to repurpose to residential.
0
London & the South East Rest of UK
this accounts for around a third of all space. In Inner London
the major sector is food-related occupier activity, which takes Broader risk measures for multi-let, such as retention after 2019 2020 to Q2 2021 annualised
up around a quarter of all multi-let floorspace. Increasingly this expiry, propensity to exercise breaks and the default rate have
has been accounted for by the rapid expansion of last mile all improved recently or were ostensibly not negatively impacted Void rates by major region
Source: MSCI, Gerald Eve
food delivery specialists. Having the right network of locations by covid. Government interventions have been impactful of %
for these operators is key and, since supply of multi-let units is course, but the conditions of the pandemic have arguably been as 20
essentially fixed, rents have pushed up. Tenancy lengths have beneficial for many of the smaller industrial occupiers as their larger 18
continued to trend downwards, which is great both for these counterparts. This combined with the flexibility and entrepreneurship 16
types of tenants seeking flexibility and for landlords to capture of many of these smaller tenants has led them to flourish for
14
12
the rent reversion. now. Looking forward however, almost a third of all UK multi-let 10
floorspace has a lease event over 2021/22. This represents a key 8
risk as the economy heads towards a difficult period of intensified 6
4
inflation mixed with the impacts of Brexit and as supportive
2
government policies are taken away. 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Q1 2021 Q2 2021
London & the South East Rest of UK
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UK PROPERTY SEGMENTS UK ECONOMY SPOTLIGHT OUTLOOK C O N TAC T
Outlook
All Property total return is forecast to hit 12.0% in 2021, before
Total return and components by sector
slipping back to 8.8% in 2022. This will be driven in the short term Source: Gerald Eve, MSCI
by the surge in industrial rents and yield tightening, and as retail
and leisure pricing stabilise and contribute positively again in Retail Industrial
some cases by the end of 2021 and into 2022. % %
25
15
1.2% 8.0% 10.0%
10
21.0% 11.2% 5.6%
There will be sustained underlying strength in the industrial market, 5
20
not only in London and South East multi-let, but also wider UK 0 15
distribution warehouses. The current late cycle surge in investment -5
activity and pricing will boost total return in 2021. However, this -10 10
very keen pricing going into more uncertain economic conditions in -15
5
2022 suggest this exceptional rate of return will not be maintained. -20
-25 0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2015 2016 2017 2018 2019 2020 2021 2022 2023
Headline office rents in the regions are expected to erode over
2021 as tenant-controlled space continues to increase. Thus some Office All Property
further yield softening in the short term is expected – particularly % %
for secondary assets with short income that pose greater 20 15
12.0% 8.8% 7.1%
operational and ESG challenges. 15
10
2.8% 6.8% 6.9%
10
5
Retail should experience some further but smaller falls in rents and 5
more moderate outward yield shift in 2021. A non-negative annual 0
0
total return in 2021 driven by retail warehouses will be the first since
-5
2017. By 2022 total return should increase to be relatively competitive -5
against other sectors, boosted by a large income return component. -10 -10
2015 2016 2017 2018 2019 2020 2021 2022 2023 2015 2016 2017 2018 2019 2020 2021 2022 2023
Income return Rental growth Yield impact Total return
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UK PROPERT Y SEGMENTS UK ECONOMY SPOTLIG HT OUTLOOK CO NTAC T
Contact
Research Further Insight
STEVE SHARMAN BEN CLARKE OLIVER AL-REHANI
Partner Partner Senior Research Analyst
ssharman@geraldeve.com bclarke@geraldeve.com oal-rehani@geraldeve.com
Tel. +44 (0)20 7333 6271 Tel. +44 (0)20 7333 6288 Tel. +44 (0)20 7518 7255
Capital Markets Agency Valuation
JOHN RODGERS MARK TROWELL RICHARD MOIR
Manchester BTR Multi-Let Euro Logistics Prime Logistics
Partner Partner Partner 2021 Q2 2021 Summer 2021 Q2 2021
jrodgers@geraldeve.com mtrowell@geraldeve.com rmoir@geraldeve.com
Tel. +44 (0)20 3486 3467 Tel. +44 (0)20 7333 6323 Tel. +44 (0)20 7333 6281 BRIEFING NOTE
June 2021
SUSTAINABLE RETROFIT IN THE
BRIEFING NOTE
June 2021
WESTMINSTER’S ENVIRONMENT
INDUSTRIAL SECTOR SUPPLEMENTARY PLANNING DOCUMENT
Cordelia Batt James Wickham
Senior Surveyor Partner
Tel. +44 (0)20 3486 3613 Tel. +44 (0)20 333 6353
cbatt@geraldeve.com jwickham@geraldeve.com
James Yarham Justin Quiney Westminster City Council has released its draft Environment
Senior Planning Consultant
Senior Surveyor Challenge
Tel. +44 (0)20 7333 6287
Supplementary Planning Document for consultation. This follows the
Tel. +44 (0)20 3486 3718 adoption of its City Plan in April 2021. The draft SPD is a wide-ranging
jquiney@geraldeve.com
jyarham@geraldeve.com Climate change is one of the biggest challenges facing humanity. document, providing much of the necessary detail to support the
With the built environment accounting for around 40% of the world’s formal policies within the new plan.
carbon footprint, the real estate industry has a key role to play in
the reduction of emissions. This is something that the industrial Westminster City Council has released its draft Environment Supplementary
Our advice and recommendations are underpinned by the in-depth
sector is devoting significant energy and resource into doing. Planning Document for consultation. This follows the adoption of its City Plan
in April 2021. The draft SPD is a wide-ranging document, providing much of the
In the last decade sustainability has moved to the forefront of the industrial necessary detail to support the formal policies within the new plan. It will form an
agenda, with occupiers demanding sustainable space, investors targeting important additional layer of guidance for developers and occupiers considering
sustainable assets and developers building high specification units that align development or changes of use in Westminster, effectively restating and replacing
with the strictest environmental standards. much of the detailed policy that was previously contained within Part 2 of the
old Unitary Development Plan, which finally ceased to apply on adoption of the
However, the opportunity to occupy, purchase or build new industrial buildings new Plan. The draft guidance also specifically seeks to give “more prominence and
is clearly limited, therefore there is increasing focus on existing stock. Bearing in weight to environment issues” than the current planning framework does and is
mind 87% of buildings that will be in existence in 2050 have already been built, described as a “game changer” on some issues.
improving their sustainability is key if the UK is to meet its net zero commitment
by then. Further still, with stricter MEES regulations due to come into force in
April 2023 building owners must act now or be faced with unlettable assets.
analysis of our award-winning research team. With a particular focus geraldeve.com geraldeve.com
on investment, London offices and industrial, our researchers work London Markets
Q2 2021
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June 2021
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June 2021
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Q1 2021
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In Brief is a short summary of market conditions and is not intended as advice. No responsibility can be accepted for loss or damage caused
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