DTZ presented it’s ‘2015 Outlook’ for the property market at an event today, providing key insights for both occupiers and investors for the year ahead.The breakfast presentation held at The Bristol Hotel today revealed that UK commercial property investment reached an all-time high in 2014, with £54.9 billion transacted, with the increase driven by investment outside of London, which increased from £25.4bn in 2013 to £34.4bn in 2014.
The UK regions have been an attractive option, given the higher yields on offer than in London, and with occupier markets underpinned by increasing demand and ongoing limited supply. DTZ also observed a dramatic increase of the flows into domestic retail funds during the second half of 2013 and over 2014, boosting institutional demand.
Overseas investment continued to dominate in London, representing over 68% of transactions in 2014, but the real increase in overseas investment was again in the rest of the UK. This increased significantly from a 28% share of the total in 2013 to 36% in 2014, driven by significant surges in investment from the US, China and, in particular, Europe.
Ben Clarke, Head of UK Research at DTZ commented: “DTZ has tracked an upward trend of new global capital targeting the UK for the year ahead, reaching £28bn in 2014. Inflows to retail funds also remain strong, so we expect downward yield momentum to continue into 2015, with secondary continuing to move in faster than prime. However, as pricing in the UK gets ever keener, some of this capital could be diverted to Europe, where there is more opportunistic investment for distressed assets.”
Looking ahead, DTZ downplayed some perceived risks to UK property markets, including the impact of the general election and volatility in energy prices. A possible EU referendum may lead to a significant pause in investment and occupier market activity in the lead up to any vote but this would not be for several years.
The most important issue impacting property remains the ongoing ultra-low interest rate environment that has almost certainly been prolonged into 2016 with the release of record low inflation figures. This is especially relevant since DTZ expects more UK property markets to be overvalued than undervalued by early 2015.
Ben Clarke explained: “The longer the yield spread between property and bonds is, and is expected to be favourable, the further property yields will be compressed. The UK all-property total return for 2015 is set to again be a double digit, though we expect it to fall short of 2014’s near-20% return. However, front-loading returns in this way comes at the cost of a sharper correction to commercial property down the line when the interest rate environment eventually normalises.”
The DTZ event also revealed that whilst the main drivers of returns have been on the investment side, there has also been a significant turnaround in most occupier markets. Office take-up in the key UK centres outside of central London was a record 5.7 million sq ft in 2014. A record volume of grade B lettings reflected the extreme shortage of grade A stock. However grade A pre-letting made a resurgence at the end of the year in response to a much-needed, albeit historically small, increase in the development pipeline.
The Industrial market had a record volume of grade A take-up in the first half of 2014, and overall 2014 lettings were the highest since 2008. DTZ has tracked an increase in demand for large distribution hubs as retailers adapt their strategies in response to ongoing increases in online spending and the ‘click and collect’ phenomenon which took hold in 2014. This has helped kick-start industrial speculative development in the Midlands and the South East.
Nick Allan, Senior Investment Director at DTZ in Bristol, commented: “We have seen a record breaking year for Bristol and have many reasons to be positive moving in to 2015. Firstly, public sector investment around infrastructure is finally starting to materialise with the Metrobus, Temple Gate, Electrification of the London line and the bridge construction at the Arena as well as the selection process of SMG/Live Nation as operator and with the Design Award due out next month.
“In the context of the office market, there was one of the highest levels of both grade A take-up and overall take up in the city centre during 2014, which pushed headline rents to a new level, evidenced by 66 Queen Square being let to PwC at £28.50 per sq ft. In tandem, we have seen over 700,000 sq ft of office space come out of the market and brought forward for development for residential or student accommodation through Permitted Development Rights or planning. This bodes well for stronger performance in the rental market across the board in 2015 and beyond with the dearth of stock and those considering speculative development at perhaps Finzels Reach or Three Glass Wharf.
“Industrial has also seen increased take-up and falling availability, largely driven by food retailers, e-retailing or third party logistics. We continue to see very little speculative development of note, although certain developers are now considering it seriously for the first time in many years.
“The investment market has seen significant yield compression driven by the lack of opportunities and weight of money both from traditional institutions and global investors principally from Asia and the US. We have seen a number of landmark deals with a 50% stake in Cabot Circus sold for £273million to Axa Real Estate and a Chinese investor, the Morrisons RDC at Bridgwater sell to Aviva Investors for around £60million and Henderson’s acquisition in a stake at Princesshay, Exeter for £130million.”
