Commercial Property - UK - June 2018

EXECUTIVE SUMMARY
The market
Commercial property market demonstrates solid performance in 2017
Figure 1: Value of UK commercial property market, 2009-17
Investment market supported by continued influx of overseas buyers and a better than expected economic performance in 2017
Figure 2: Investor-owned share of UK commercial property market, 2013-17
Retail remains largest sector of commercial property market
Share of office sector rises to 31% in 2017
Industrial property outperforms all other major sectors in 2017
Investors continue to be attracted to ‘alternative’ assets
Outlook for industrial and ‘other’ commercial property market remains positive, but sentiment in retail sector weakens
Figure 3: Segmentation of the UK commercial property market, by sector, 2013-17
Market factors
Record low interest rates provide positive impetus for investment market, but hikes are on the horizon
BOE downgrades economic growth forecast for 2017
Business rate hikes contribute to woes faced by retailers
Companies
Overseas investors are the largest investor type in the UK commercial property market
Institutional investors are the second largest investor type
Real Estate Investment Funds (REITs) dominate shopping centre sector
Figure 4: Holdings in commercial property market, by investor type, 2017
What we think
KEY INSIGHTS
What is the impact of Brexit on the UK commercial property market?
What is the short-term outlook for the key sectors of the commercial property market?
Why are ‘alternative’ commercial property assets becoming more popular with investors? Which assets attract the most attention?
INTRODUCTION
Definitions
Methodology
Abbreviations
Market positioning
The commercial property performance cycle
UK ECONOMY
Overview
Figure 5: Forecast GDP development 2017-22
Figure 6: UK GDP quarterly development, 2004-18
Inflation
House prices
Figure 7: UK house price changes, 2007-18
Interest rates
Consumer spending
Manufacturing
Figure 8: UK manufacturing, 2014-18
Business investment
Figure 9: UK GFCF 2003-17
Imports
Exports
MARKET FACTORS
Key points
Economic factors
UK Purchasing Manager Index (PMI) for Services Industries
UK Manufacturing Purchasing Manager Index (PMI)
Retail sales and rise in online sales
Figure 10: Growth of value of retail sales at current prices seasonally adjusted, 2011-17
Other factors
Impact of planning laws on commercial property supply
Supply and demand factors
Latest business rates revaluation has biggest impact on London retail and office sectors
Proposed to Capital Gains Tax (CGT) for offshore vehicles could dampen overseas investor sentiment
Return on property investment
Figure 11: Annual property returns, by sector, 2013-17
Government Hubs programme to boost regional office take-up in the short term
New stamp duty rates for commercial property
Non-residential property transactions
Figure 12: UK non-residential property transaction completions, by country, 2013-17
Figure 13: UK non-residential property transaction completions, 2013-17
Private commercial construction output
Figure 14: Long term trend in private commercial construction output in Great Britain, 1970-2017
Figure 15: Analysis of private commercial construction in Great Britain, by type, 2013-17
Private industrial construction output
Figure 16: Long term trend in private industrial construction output in Great Britain, 1970-2017
Figure 17: Analysis of private industrial new construction work in Great Britain, by sector 2013-17
MARKET SIZE & SEGMENTATION
Key points
Overview
Commercial property investment market proves robust in 2017
‘Alternative’ commercial property attracting increased interest from investors looking for secure, long-term income
Figure 18: Value of UK commercial property market, 2013-17
Figure 19: Value of UK commercial property market, 2009-17
Figure 20: Investor share of UK commercial property market, 2013-17
Figure 21: UK commercial property floorspace and rental value, 2009-16
Market segmentation
Segmentation by sector
Figure 22: Segmentation of the UK commercial property market, by sector, 2013-17
Figure 23: Sector share of investor-owned commercial property stock, 2017
Segmentation by investor-type
Figure 24: Holdings in commercial property market, by investor type, 2015-17
Figure 25: Investor commercial property market, by sector, South East and rest of UK, 2017
OFFICE SECTOR
Key points
Overview
Overseas investors drive growth in London office sector
Shift away from owner-occupied offices
Rise in demand for flexible workspace
Investors look to prime regional office markets for investment opportunities
London offices
London office supply pipeline
Regional office supply pipeline
Figure 26: Capital value of the UK office market, 2013-17
Figure 27: UK offices market, by region, 2017
Figure 28: Office property transactions in Great Britain, 2013-18
Figure 29: Office Property transactions by investor type, year-to-date 2018
Figure 30: UK office floorspace and rental value, 2010-16
RETAIL SECTOR
Key points
Overview
UK retail property sector undergoes major structural change, driven by online and multichannel retail
Retail property owners continue to face considerable risks amid rising rate of retail failures and store closures
Winners emerge out of the structural change
Investor sentiment remains cautious in the retail sector
Shopping centre developments embrace the leisure ‘experience’ economy
Investors return to supermarket property after a few years of muted activity
Figure 31: Capital value of the UK retail property market, 2013-17
Figure 32: UK retail property market, by sector, 2017
Figure 33: Retail property transactions in Great Britain, 2013-18
Figure 34: Shopping centre property transactions by investor type, year-to-date 2018
Figure 35: Retail warehouse property transactions by investor type, year-to-date 2018
Figure 36: Shop/supermarket property transactions by investor type, year-to-date 2018
Figure 37: UK retail floorspace and rental value, 2010-16
INDUSTRIAL SECTOR
Key points
Overview
Momentum in rental growth is maintained in 2017
Industrial & logistics continues to represent one of the most attractive sectors for investors
Low levels of supply remain an issue in logistics
Figure 38: Industrial speculative development under construction, February 2013-January 2018
Figure 39: Capital value of the UK industrial property market, 2013-17
Figure 40: UK industrial property market, by region, 2017
Figure 41: Industrial property transactions in Great Britain, 2013-18
Figure 42: Industrial property transactions by investor type, year-to-date 2018
Figure 43: UK industrial floorspace and rental value, 2010-16
OTHER COMMERCIAL SECTOR
Key points
Overview
Investor appetite in UK hotels sector remains strong
Operators to focus on maintaining and enhancing margins
Budget and Four-Star hotels lead UK hotel development pipeline
Figure 44: Active hotel development pipeline by grading, Q4 2017
Diverse leisure sector remains popular with investors, attracted by secure long-term income opportunities
Figure 45: Capital value of the UK other commercial property market, 2013-17
Figure 46: UK “other” commercial property market, by sector, 2017
Figure 47: Property transactions in the leisure sector in Great Britain, 2013-18
Figure 48: UK “other” commercial floorspace and rental value, 2010-16
REGIONAL ANALYSIS
Key points
Regional analysis of non-domestic properties in England & Wales
Figure 49: Number of non-domestic rateable properties in England & Wales, by sector and region, as at 1 April 2017
Figure 50: Rateable value of non-domestic properties in England & Wales, by sector and region, as at 1 April 2017
Regional analysis of commercial property transactions
Figure 51: Commercial property transactions in Great Britain, by region, 2013-17
Figure 52: Regional importance in commercial property transactions, 2015-17
MARKET TRENDS
Key points
Development of commercial property yields
Figure 53: Prime market yields, by sector, 2015-18
Rental price developments
Figure 54: Prime office rents in the UK, December 2011- December 2017
Figure 55: Prime retail rents in the UK, December 2011-December 2017
Figure 56: Prime industrial rents in the UK, December 2011-December 2017
Trends in average lease lengths
Figure 57: Average length of leases, by tenant type, 2017
Shift from owner-occupied towards rented commercial property
Trends in commercial property lending
The commercial property lending market has seen increased diversification and specialisation over recent years
Figure 58: Outstanding debt secured by commercial property lender, by lender type, 2017
New loan originations remained flat in 2017, with a stronger performance in the second half of the year
Figure 59: Allocation of new loans originations, by lender-type, 2017
Average loan-to-value ratios remain below 60%
INDUSTRY STRUCTURE
Key points
Overview
Figure 60: UK investor share and overseas investor share in each commercial property sector, 2016
Figure 61: Holdings in commercial property market, by investor type, 2017
Overseas investors
Figure 62: Overseas holdings in commercial property market, by investor type, 2016
REITs
Institutional investors
Figure 63: Holdings in buildings, property, land and new construction work by institutional groups, 2011-16
Figure 64: Net investment in buildings, property, land and new construction work by institutional groups, 2012-17
COMPANY PROFILES
BRITISH LAND
Company strategy
British Land cuts exposure to speculative developments post Brexit vote
Figure 65: Financial analysis of British Land, 2013-17
LANDSEC/LAND SECURITIES
Company strategy
Figure 66: Financial analysis of Land Securities, 2013-17
GREAT PORTLAND ESTATES
Company strategy
Figure 67: Financial analysis of Great Portland Estates, 2013-17
HAMMERSON
Hammerson pulls back from Intu takeover
Company strategy
Figure 68: Financial analysis of Hammerson, 2013-17
INTU PROPERTIES
Company strategy
Figure 69: Financial analysis of Intu Properties, 2013-17
DERWENT LONDON
Company strategy
Figure 70: Financial analysis of Derwent London, 2013-17
A & J MUCKLOW GROUP
Company strategy
Figure 71: Financial analysis of A & J Mucklow Group, 2013-17
HANSTEEN HOLDINGS
Company strategy
Figure 72: Financial analysis of Hansteen Holdings, 2013-17
DAEJAN HOLDINGS
Company strategy
Figure 73: Financial analysis of Daejan Holdings, 2013-17
SEGRO
Company strategy
Figure 74: Financial analysis of Segro, 2013-17
SHAFTESBURY
Company strategy
Figure 75: Financial analysis of Shaftesbury, 2013-17
WORKSPACE GROUP
Company strategy
Figure 76: Financial analysis of Workspace Group, 2013-17
BRUNTWOOD
Company strategy
Figure 77: Financial analysis of Bruntwood, 2013-17
LONDONMETRIC PROPERTY
Company strategy
Figure 78: Financial analysis of LondonMetric Property, 2013-17
GROSVENOR GROUP
Company strategy and outlook
Figure 79: Financial analysis of Grosvenor Group, 2013-17
MARKET FORECAST
Key points
Commercial and industrial construction output forecast
Figure 80: Forecast private commercial construction output in Great Britain, 2018-22
Figure 81: Forecast of private commercial construction in Great Britain, by sector, 2018-22
Figure 82: Forecast private industrial construction output in Great Britain, 2018-22
Figure 83: Forecast of private industrial new construction work in Great Britain, by sector 2018-22
Commercial property market forecast
Outlook for commercial property market remains cautiously optimistic despite concerns following Brexit vote
Investor sentiment remains largely positive
Investor demand focused on secure income streams
Investor appetite for alternative assets remains strong
Core regional centres attract increased investor interest
Northern Power House and Midlands Engine to support regional growth
Figure 84: Forecast of UK commercial property market, 2018-22
Figure 85: Development of the UK commercial property capital value, 2013-17 (historic) and 2018-22 (forecast)
Figure 86: Projected investor share of UK commercial property market, 2018-22
Market forecast segmentation
Figure 87: Forecast segmentation of the UK commercial property market, 2018-22
Figure 88: Forecast segmentation of the UK commercial property market, 2018-22
FURTHER SOURCES & CONTACTS
Trade associations and bodies
British Property Federation
The Association of Real Estate Funds
British Council for Offices
The Commercial Real Estate Finance Council Europe
The Investment Association
The Investment Property Forum
Trade exhibitions and conferences
RICS Commercial Property Conference
MIPIM UK 2018
Trade magazines
Estates Gazette
Property Magazine International
Property Week
Property Wire