Last January we said that whilst we were experiencing some increased levels in activity, we believed that some sectors would still continue to suffer.
2013 however, experienced a considerable increase in confidence as the economy recovered far quicker than many expected, particularly in the latter part of the year.
We do not believe this additional activity to be “a blip” and the recovery seems to be fully underway.
There is a prospect of an increase in interest rates, but at the moment this seems to be some distance away and the market is moving ahead with considerable confidence, although there is a need to be cautious in some sectors.
Our predictions are:
FOOD RETAIL
The focus of expansion for the majority of operators in their “race for space” has shifted with emphasis from large store formats to the smaller convenience stores. We predict a high level of demand for smaller stores and this will continue unabated while demand for “new to market” large food store sites will be limited along with the level of headline rents offered.
Rental growth will continue in the convenience sector as the operators compete to acquire prime units in their drive to increase their market shares.
The discounters such as Lidl and Aldi will increase their rate of expansion.
OUT OF TOWN (NON FOOD) RETAIL
The embryonic signs of recovery in this sector will cautiously improve this year with new operators entering the market promoting requirements for outlets. The discounters’ appetite will remain strong but will be looking for attractive terms in return for larger representation on Parks. Rents overall will not rise significantly unless new “prime” stock is made available on the best Open A1 Shopping Centre Parks.
HIGH STREET RETAIL
The Christmas trading period delivered a mixed message, with some reporting strong sales and good trade, while others issued profit warnings.
Some of the success has been a result of operators having greater exposure to Internet sales and operating “Click & Collect” facilities. More retailers will be looking to emulate these success stories and evolve multi-channel retailing practices in a process that will also seek to attract greater consumer footfall to their stores.
It is likely there will be improved consumer confidence and hence increased spending. In the right locations, retailers will seek to expand, particularly in London and the South East, which will create upwards pressure on rents.
Overall, however, we believe there will continue to be a polarisation in this sector as retail operators continue to consolidate their portfolios within the top ranked 150 towns.
Rents in secondary locations will remain under pressure.
PETROL FORECOURTS
As predicted at the start of 2013, a number of new to industry sites are now coming forward, predominantly driven by the supermarkets and some well-funded independent operators. Asda have announced they will be joining the fray, seeking an additional 100 filling stations by 2018.
The major oil companies have been upgrading their existing network and this is likely to continue in 2014. Some oil companies are also looking for new to industry opportunities and we expect there to be more activity in this market.
The market for existing filling stations will experience good interest for well-priced opportunities.
There is likely to be a further round of disposals from the major oil companies of their non-core sites.
MOTOR DEALERSHIPS
Car sales in 2013 were strong and with optimism in the market. Leading dealer groups are starting to look for new opportunities, particularly in the premium sector. Also the value brands such as Skoda, Hyundai and Kia are all performing well, and their dealers will look to invest and improve their network representation.
The number of vacant dealerships continues to fall as premises are re-occupied by other franchises or converted for alternative uses. Whilst we expect some further consolidation in the dealership market the outlook is a positive one.
ROADSIDE RETAIL/TRADE COUNTER
Demand will continue to be strong from a number of roadside/retail/trade counter occupiers, with Majestic Wine, Topps Tiles, Halfords Autocentres and Formula One Autocentres underpinning the market and seeking to further develop their networks in 2014.
Demand will be primarily focused on existing buildings which are capable of conversion and refurbishment, although new build opportunities will also be considered. We see further growth in this sector in 2014.
BUSINESS SPACE
Warehousing/industrial will build on the momentum of 2013, with vacancy in well specified buildings in good locations falling to historically low levels. Rents will show modest growth and tenant incentives will fall back as the market returns to balance in a pre-let context.
A similar trend has emerged in the office market with supply of prime buildings limited and the longer gestation periods for such buildings adding to the lag.
There are suggestions that speculative development will become a characteristic once again across both sectors but it seems more likely that continued caution from developers/investors will mean pre-lets/sales will be required before most will commit to construction.
COMMERCIAL DEVELOPMENT
As the economic recovery gains traction, new commercial development activity is likely to increase at a faster rate than many forecasters predicted six months ago. A shortage of prime office and industrial stock, combined with the increased availability of affordable finance, will aid viability of some, more marginal schemes, and is likely to result in an increase in competition for development opportunities throughout 2014.
2014 will see many local authorities finally implement their CIL policy. Whilst this should eliminate some of the uncertainty in calculating planning contributions, and therefore speed up the planning process, the impact on viability will need to be closely monitored.
Mixed use schemes and in particular food retail anchored developments will continue to be popular with developers as occupier demand for convenience store units will remain strong as noted above.
Although the big picture is positive, regions outside of London and the South East are likely to see a slower rate of market recovery, as viability of new development still remains a key issue in many parts of the UK.
RESIDENTIAL DEVELOPMENT
The last 6 months of 2013 saw a significant increase in residential land values, particularly in London and the South East, which was fuelled by a rise in house prices, a more favourable planning policy framework and an increase in demand from buyers as a result of the ‘Help to Buy’ scheme.
2014 is likely to see more of the same despite the reported reigning back of the Government mortgage stimulus scheme. The policy acted as a catalyst during the market turnaround as opposed to a fundamental driver underpinning demand and further growth in values and demand is likely, given the continuing shortfall in housing supply.
Again London and the South East will be the focus for this growth but the ‘ripple effect’ will extend to other regions before the end of the year as consumer confidence in the recovery continues to grow.
House prices will see continued growth over the next 12 to 18 months. This will underpin continued increases in land values. Affordability will be the main concern for home buyers and this issue may in turn see growth in buy to let activity. Concerns over a possible increase in interest rates, may dampen price growth, however, this is unlikely to come into play this year.
INVESTMENT
Commercial property continues to be viewed as an attractive asset class as an investment sector, offering a good long term option, especially when compared to the volatilities in the equity market and the low levels of return on offer from government bonds. Even with the anticipated realignment of these asset classes, direct property investment will continue to attract significant attention from UK institutions as well as overseas investors.
In the prime sector the market will be dominated by overseas investors seeking trophy assets, with a strong focus on Greater London and institutional investors seeking long low risk income flows with a preference for RPI linked rent reviews to hedge against inflation. With RPI and CPI falling, we expect indexation collar and caps to be of growing importance this year. Whilst the focus remains on prime assets we anticipate yields for good quality secondary assets will move in during 2014, resulting in a narrowing of the gap between prime and secondary yields.
The general picture for 2014 is positive but there will remain a large variation in performance across different locations and sectors. For good quality properties in strong locations, offering secure income and strong underlying fundamentals, there will remain robust demand for sensibly priced stock.
TOWN PLANNING
Local authorities will continue to adopt regimes for Community Infrastructure Levies during 2014 however, notwithstanding the two sets of regulatory reforms over the past year, the system still requires a radical rethink at the least.
The conversion of office space to residential, courtesy of the changes to the permitted development regime implemented last year, will continue apace, particularly given the recent High Court decision, dismissing a challenge to the rules by three London authorities.
It is becoming apparent that local authorities will struggle to identify five year supplies of housing, providing opportunities for developers to promote land lying outside settlement boundaries, and creating an incentive for local authorities to support residential development on previously developed sites.
The Government will continue to attempt to reform the planning system, in the interests of encouraging economic growth.
CORPORATE REAL ESTATE
As predicted last January, 2013 was a challenging year in corporate real estate with the demise of yet more high street brands. In contrast the green shoots of recovery already mentioned are demonstrated by some remarkable turn arounds including BonMarche and the restructuring of Clinton Cards/AG Retail.
So we enter 2014 with more hope than we entered 2013 and we are certain Corporate Real Estate teams at Managing Agents are being strengthened in the expectation of significant further outsourcing by corporate occupiers, who are looking to keep costs to a minimum by ensuring their property portfolios are actively asset managed and run at optimal cost. Our Corporate Real Estate business grew significantly over the past year and we are poised for significant further growth.
RATING
In England and Scotland the 2014/15 business rate has been set at 2% above this year’s rate. The English rate supplement will increase from 0.9p/£ to 1.1p/£. Scotland is likely to follow suit and the Scottish Public Health Levy of 13p/£ will continue to apply to all large retail properties licensed to sell alcohol and tobacco products. The rate for Wales is still to be confirmed.
“Small Business” rate relief schemes have been extended and some new incentive measures have been announced to encourage new occupants into previously vacant premises.
As the Chancellor stated that by July 2015, 95% of all English rating appeals outstanding as at September 2013 will be resolved, the rating appeal system will be severely tested, in particular the Valuation Tribunal’s capacity to clear their backlog of cases awaiting hearing. Resources will be diverted from dealing with fresh appeals from ratepayers still to exercise their appeal rights and new material change of circumstance appeals. Inevitably this will cause a delay in ratepayers receiving their refunds.
BUILDING CONSULTANCY & PROJECT MANAGEMENT
The latest round of tender price forecasts have been largely upgraded to account for the growing positive news in the Construction Industry. Tender price inflation is likely to ‘turn a corner’ this year according to the latest consensus on growth forecasts. Tender price forecasts show rises across the UK on average 3.8% (Q3 2013 to Q3 2014) and 4.1% (Q3 2014 to Q3 2015) whilst building costs for the same period are 1.9 % and 2.8 % respectively (BCIS Quarterly Briefing December 2013).
As construction demand grows and materials costs rise new build will become more expensive and require competent Project Management to deliver schemes on time and within budget.
As the UK economy expands transactional property activity will inevitably follow and with that the need to understand commercial property costs and dilapidation exit strategies will become ever more important in property decision making. Understanding commercial liability and lease repairing obligations will be essential in deciding whether to stay or move as repair and building reinstatement costs increase.