Muted growth forecasts from GVA
Despite some better economic news during the past month, the UK economic outlook remains weak and the forecasts for the fourth quarter suggest that a strong rebound is most unlikely, says GVA in its most recent Economic and Property Market Review. Debt reduction for businesses, households, banks and the government could continue to depress economic growth for a number of years, the firm adds, which will affect the outlook for the property market. It expects bank finance to remain in short supply, occupier demand to be weak (but slowly improving), and only a slow increase in development activity outside London.
GVA notes that the latest RICS UK Commercial Market Survey reflects the weak economic climate, with surveyors reporting an overall decline in occupier demand in the third quarter (a net balance of -9% vs. -7% in Q2). The survey also suggests that supply continued to increase during Q3, as in the first two quarters – although the rate of increase is noticeably slower than in 2011.
While it appears that there has been little change in development activity for the UK as a whole over the past two years, activity levels in Central London are relatively strong and rising, GVA says. As of the third quarter there was 10.3m sq ft of Central London office space under construction, compared with 6.3m sq ft a year earlier. The Central London property market has continued to drive the UK market as a whole, with average office rental values in Central London as measured by the IPD Quarterly Index up 3.6% in the year to Q3 and the figure for Central London retail property also rising by 3.6%. Outside London, average rental values have continued to fall modestly across most mainstream markets – although GVA notes that supermarkets have been the exception, with rental values up 1.9% for the UK as a whole in the year to Q3. As ever, the quality of the asset is a key factor in performance.
GVA feels it is difficult to foresee any marked increase in occupier demand next year, given the muted outlook for UK economic growth. Outside Central London, it expects average rental values to be broadly flat, and to rise by around 10% over the next five years – well below expected inflation (which is good news for occupiers). In Central London, the firm forecasts “respectable” rental growth for office space and retail property of around 3%, similar to 2012. It notes that this is slightly above forecast inflation and so represents growth in real as well as nominal terms.
From 2014 GVA expects the rate of growth to start to accelerate once more. “We forecast that by the end of 2017 average rental values will have increased by around 25% compared with current levels,” the firm adds
