Encouraging Signs in UK Commercial Property Market With A Few Bumps In The Road.
Latest July figures from Capital Economics in the UK is showing June Property Investment amounting to £1.4 billion, an 86% increase since May suggesting it was probably the lowest month for 2020 transactions. With a further gradual improvement expected in Investment over the the following months, much interest will now focus on Q4 in order to get a better picture of the recovery.
Savills announced that industrial take-up in the UK was up 33% y/y to 14.4 m. sq. ft. in Q2, being the strongest Q2 on record. Simultaneously, regional take up augmented by 52% y/y to 17.9 m. sq. ft. in H1, mainly because of rises in the North West, East, Midlands and Yorkshire as well as some large one-off deals. It is expected that this relatively high uptake will probably level off during H2.
According to CBRE, office take-up in Central London declined by 64% y/y to 1.1 m. sq. ft. in Q2. Availability increased by 15% and vacancy by 0.9%. Due to construction delays, some completions have been pushed back to 2021. However, completions are still expected to rise from 4.9 m. sq. ft (in 2019) to 5.6 m. sq. ft. in 2020.
Rental Values
All property rental values fell by 0.4% m/m in June, which was the same as in May. There was a small growth in rents for industrial properties however, there was a drop in offices, retail and leisure rents. Retail rents fell by 1.1% m/m in June which was slightly less than the 1.3% drop in May. With footfall being down, social distancing measures along with a small economic recovery, retail rents are expected to fall by 9% y/y in 2020.
Industrial rents were the only sector to see growth in recent months. With supply tight and a surprising Covid-related increase in demand in Q2, Rest of South East industrial outperformed. Undoubtedly, recent rental trends have been more positive than expected, but due to lags in valuation and economic headwinds, further downward pressure on rental values is expected in H2.
Economic Indicators
While the UK experienced encouraging signs of recovery in the manufacturing and service sectors in June, Capital Economics are forecasting a few more bumps down the road and it cannot be assumed that the GDP will recover to its pre-pandemic value anytime soon.
There was an increase of 13% in retail sales in June (only 1% lower than its pre-pandemic level), with a big boost in non-food sales in particular. The furlough scheme has been successful in preventing an increase in unemployment, however it is expected that this will plateau when the scheme ceases. Further deflation is expected in consumer prices following VAT cut for the hospitality and tourism sectors.
Much like the Irish Commercial Property, the UK market is hoping for a strong Q4 finish to 2020 and a chance to create some supportive transaction evidence to aid Investor confidence and help make up for some lost ground and uncertainty created during the pandemic.
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