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Commercial Property - UK - July 2019

OVERVIEW
What you need to know
Covered in this Report
EXECUTIVE SUMMARY
The market
Commercial property market showed resilience in 2018 amid political and economic uncertainty
Figure 1: Value of UK commercial property market, 2009-18
Growth in investor-owned share of commercial property slows in 2018
Figure 2: Investor-owned share of UK commercial property market, 2014-18
Investors reduce exposure to retail sector, shift to industrial and alternative assets
Figure 3: Segmentation of the UK commercial property market, 2014-18
Market outlook turns more uncertain
Companies and brands
Overseas investors represent largest single investor type in the UK commercial property sector
Share held by UK institutions has dropped over the last 10 years
Figure 4: Holdings in commercial property market, by investor type, 2018
What we think
ISSUES AND INSIGHTS
While investors are retrenching from struggling retail sector pockets of the sector offer opportunities
The facts
The implications
Rapid growth in flexible workspace sector drives demand for offices
The facts
The implications
THE MARKET – WHAT YOU NEED TO KNOW
Struggling retail sector drags down performance of UK commercial property market in 2018
Investor interest in prime commercial property remained robust in 2018
But investor interest across different assets varies strongly
Commercial property capital value expected to fall over the next two years
MARKET SIZE
Overview
Figure 5: Value of UK commercial property market, 2014-18, (£ billion)
Figure 6: Value of UK commercial property market, 2009-18
Growth in investor-owned share of commercial property slows in 2018
Figure 7: Investor share of UK commercial property market, 2014-18, (£ billion and %)
Figure 8: UK commercial property floorspace and rental value, 2009-17
MARKET SEGMENTATION
Segmentation by sector
Figure 9: Segmentation of the UK commercial property market, by sector, 2014-18, (£ billion)
Figure 10: Sector share of investor-owned commercial property stock, 2018, (% of capital value)
Segmentation by investor-type
Figure 11: Holdings in commercial property market, by investor type, 2014-18, (£ billion)
Figure 12: Investor commercial property market, by sector, South East and Rest of UK, 2017, (£ billion and % of total)
OFFICE SECTOR
Offices represent largest sector of commercial property investment market
Overseas investors own around half of all invested office stock in the UK
Rapid growth in flexible workspace sector drives demand for offices
Robust regional prime office market
Market fundamentals for London offices remain strong
London office supply pipeline
Regional office supply pipeline
Invested stock accounts for around 78% of UK office property stock
Figure 13: Capital value of the UK office market, 2014-18, (£ billion)
Figure 14: UK offices market, by region, 2018, (% of total)
Figure 15: Office property transactions in Great Britain, 2014-19
Figure 16: Central London office property transactions by investor type, year-to-date 2019
Figure 17: Rest of UK office property transactions by investor type, year-to-date 2019
Figure 18: UK office floorspace and rental value, 2010-17
RETAIL SECTOR
Prolonged period of structural change in retail sector exerts downward pressure on property market
Oversupply of retail space is leading to many units being repurposed
Investors reduce exposure to retail sector
Shopping centre developments embrace the leisure “experience” economy
Retail assets represent an estimated 34% of total UK commercial property market, down from 40% in 2014
Figure 19: Capital value of the UK retail property market, 2014-18, (£ billion)
Figure 20: UK retail property market, by sector, 2018, (% of total)
Figure 21: Retail property transactions in Great Britain, 2014-19
Figure 22: Shopping centre property transactions by investor type, year-to-date 2019
Figure 23: Retail warehouse property transactions by investor type, year-to-date 2019
Figure 24: Shop/supermarket property transactions by investor type, year-to-date 2019
Figure 25: UK retail floorspace and rental value, 2010-17
INDUSTRIAL SECTOR
Overview
Momentum in rental growth is maintained in 2018
Investor appetite for logistics property remains strong
Supply-demand imbalance is driving considerable new development activity
Figure 26: Industrial speculative development under construction, February 2014-January 2019
Industrial sector continues to show strong capital value growth in 2018
Figure 27: Capital value of the UK industrial property market, 2014-18, (£ billion)
Figure 28: UK industrial property market, by region, 2018, (% of total)
Figure 29: Industrial property transactions in Great Britain, 2014-19
Figure 30: Industrial property transactions by investor type, year-to-date 2019
Figure 31: UK industrial floorspace and rental value, 2010-17
OTHER COMMERCIAL SECTOR
Overview
Investor appetite in UK hotels sector remains strong
UK hotel development market set for continued, albeit slower, growth
Diverse leisure sector remains popular with investors, attracted by secure long-term income opportunities
Capital value of ‘other’ commercial property sector up by an estimated 2% in 2018
Figure 32: Capital value of the UK other commercial property market, 2014-18, (£ billion)
Figure 33: UK ‘other’ commercial property market, by sector, 2018, (% of total)
Figure 34: Property transactions in the leisure sector in Great Britain, 2014-19
Figure 35: UK ‘other’ commercial floorspace and rental value, 2010-17
REGIONAL ANALYSIS
Regional analysis of non-domestic properties in England & Wales
Figure 36: Number of non-domestic rateable properties in England & Wales, by sector and region, as at 1 April 2017, (000s and % of total)
Figure 37: Rateable value of non-domestic properties in England & Wales, by sector and region, as at 1 April 2017, (£ billion and % of total)
Regional analysis of commercial property transactions
Figure 38: Commercial property transactions in Great Britain, by region, 2015-19, (£ million)
Figure 39: Regional importance in commercial property transactions, 2016-18
MARKET FORECAST
Outlook for commercial property market turns more cautious
Investor sentiment wanes amid ongoing political and economic uncertainty
Investor demand focused on secure income streams
Expansion into alternative sectors is expected to remain a key trend
Commercial property capital value growth expected to remain restricted
Figure 40: Forecast of UK commercial property market, 2018-22, (£ billion at 2018 prices)
Figure 41: Development of the UK commercial property capital value, 2014-18 (historic) and 2019-23 (forecast)
Figure 42: Projected investor share of UK commercial property market, 2019-23, (£ billion at 2018 prices)
Industrial property and alternatives expected to continue to outperform market
Figure 43: Forecast segmentation of the UK commercial property market, 2018-22, (£ billion at 2018 prices)
Figure 44: Forecast segmentation of the UK commercial property market, 2019-23
THE IMPACT OF THE ECONOMY
GDP growth slowed to its lowest rate for six years in 2018
Figure 45: Annual GDP growth rate, 2010-18
GDP growth expected to remain subdued in 2019
Uncertainty continues to cloud businesses’ outlook
Trends in average lease lengths
Figure 46: Average length of leases, by tenant type, 2018
Business confidence remains low
Figure 47: Business confidence index, Q1 2018-Q2 2019
MARKET TRENDS
Development of commercial property yields
Figure 48: Prime market yields, by sector, 2016-19, (%)
Rental price developments
Figure 49: Prime office rents in the UK, December 2011-December 2018
Figure 50: Prime retail rents in the UK, December 2011- December 2018
Figure 51: Prime industrial rents in the UK, December 2011- December 2018
Trends in commercial property lending
The commercial property lending market has seen increased diversification and specialisation over recent years
Figure 52: Outstanding debt secured by commercial property lender, by lender type, 2018, (% of total)
New loan originations are up 12% in 2018, despite Brexit uncertainty
Figure 53: Allocation of new loans originations, by lender-type, 2018, (% of total)
MARKET DRIVERS
Economic factors
The commercial property performance cycle
Low interest rate environment provides positive impetus for investment market
UK Purchasing Manager Index (PMI) for Services Industries
UK Manufacturing Purchasing Manager Index (PMI)
Retail sales and rise in online sales
Figure 54: Growth of value of retail sales at current prices seasonally adjusted, 2011-17, (% change on previous year)
Other factors
Impact of planning laws on commercial property supply
Supply and demand factors
Business rate revaluations contribute to increased retail store closure rates in some regions
Non-UK investors eligible for Capital Gains Tax (CGT) from April 2019
Return on Property Investment
Figure 55: Annual property returns, by sector, 2014-18, (% change)
Government Hubs programme boosts regional office take-up in the short term
Non-residential property transactions
Figure 56: UK non-residential property transaction completions, by country, 2014-18
Figure 57: UK non-residential property transaction completions, 2013-18
Brexit uncertainty starts to impact commercial construction output
Figure 58: Long-term trend in private commercial construction, 1970-2018
Figure 59: Segmentation of private commercial construction output, 2014-18 (£ million)
Brexit effect on industrial construction output not yet evident
Figure 60: Long-term trend in private industrial construction, 1970-2018
Figure 61: Segmentation of private industrial construction output, 2014-18 (£ million)
COMPANIES AND BRANDS – WHAT YOU NEED TO KNOW
Overseas investors represent largest single investor type in the UK commercial property sector
Share held by UK institutions has dropped over the last 10 years
REITs retrench from embattled retail sector
INDUSTRY STRUCTURE
Overview
Figure 62: Holdings in commercial property market, by investor type, 2018, (% of total investor-owned commercial property stock)
Figure 63: UK investor share and overseas investor share in each commercial property sector, 2017
Overseas Investors
Figure 64: Overseas holdings in commercial property market, by investor type, 2017, (% of total)
REITs
Institutional Investors
Figure 65: Holdings in buildings, property, land and new construction work by institutional groups, 2013-17
Figure 66: Net investment in buildings, property, land and new construction work by institutional groups, 2014-18
COMPANY PROFILES
British Land
Company strategy and outlook
Financial performance
Figure 67: Financial analysis of British Land, 2015-19, (£ million)
Bruntwood
Company strategy
Financial performance
Figure 68: Financial analysis of Bruntwood, 2014-18, (£ million)
Grosvenor Group
Company strategy and outlook
Financial performance
Figure 69: Financial analysis of Grosvenor Group, 2014-18, (£ million)
Hammerson
Hammerson to exit retail parks
Company strategy
Financial performance
Figure 70: Financial analysis of Hammerson, 2014-18, (£ million)
Intu Properties
Company strategy and outlook
Financial performance
Figure 71: Financial analysis of Intu Properties, 2014-18, (£ million)
Landsec
Company strategy and outlook
Financial performance
Figure 72: Financial analysis of Land Securities, 2015-19, (£ million)
Segro
Company strategy
Financial performance
Figure 73: Financial analysis of Segro, 2014-18, (£ million)
APPENDIX – DATA SOURCES, ABBREVIATIONS AND SUPPORTING INFORMATION
Abbreviations
Methodology
FURTHER SOURCES AND CONTACTS
Trade associations
Trade magazines
Trade events

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