London Commercial Property Market Overview – September 2019

By September 6, 2019News

Market Commentary

The Bank of England believes that the UK economy is growing, but not as quickly as they would like. Inflation is close to its target of 2% and while interest rates are low, future rises are anticipated but, should be implemented gradually at low increments. Interest rates remain at 0.75%, where they have been since August 2018.

Growth in the UK economy has been volatile during 2019, this is down to the uncertainty of Brexit.  Growth is slow in part due to UK companies’ tentative investment plans, but also due to economic growth slowing in other countries, which has had a knock on effect for exports.

The UK economy is now forecast to grow by 1.5% this year, while consumer spending is projected to rise by a modest 1.2%, although retail sales growth of 4.2% is predicted.  The UK economy is being buoyed by the strong employment market, with the unemployment rate now at 4%.

The retail property market has seen a softening of yields this year, with prime yields moving out towards 5.25%. Occupier outlook for 2019 remains cautious, with a general perception that the retail sector will continue to be challenging, made worse by online retail sales.  Nevertheless most retail analysts agree that the physical and online sales platforms can be used to help drive each other, and that they will not be seen as outright competitors.

The prime retail market has nevertheless become fraught with turnover rents becoming more commonplace, particularly with large retailers likely to continue to undertake reviews of their portfolios. Retail property investment markets are likely to remain subdued for the foreseeable future, with further CVAs and Administrations likely. The fate of Debenhams may prove a watershed for UK retail.

The office market in London and the South East has remained relatively robust, rents having held over the last three years. As at September 2019, 50% of all office space under construction in the London area was pre let, with this figure rising to 68% in the West End, where rents are now in excess of £100 per sq. ft., whilst in the City, they are above £70 per sq. ft.  Investment yields for offices are likely to prove attractive for the remainder of 2019 and the beginning of 2020.

Generally the industrial/warehouse market has remained reasonably strong this year, being dominated by company stockpiling preparations for Brexit.  National Agents are reporting good take up of industrial/warehousing space, from a wide mix of tenants from across the industrial sector.  The supply of industrial space nationwide has risen during 2019 and now stands at 34.14 million sq. ft., but reflecting a vacancy rate of only 6.6%, suggesting demand could outstrip supply if current trends continue.

The commercial property markets are likely to remain volatile while questions remain over Brexit and our relationship with the European Union.  Until a decision is made on Brexit, uncertainty will remain, although the commercial property market is generally robust and has not seen the same decreases as in the residential sector.

William Beardmore Grey from Knight Frank has stated that “current events will not break the capital’s long standing track record of responding positively and progressively to seemingly seismic events”. London’s Surveyors and Valuers agree with this statement.

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