GVA lowers expectations for rental growth
GVA says that while the economic backdrop remains challenging for occupiers, some recent data such as more robust employment figures and “mildly encouraging” retail sales numbers indicate that there are some positive trends for occupational demand.
The sharp fall in construction activity in Q2 demonstrates the weakness of the development sector and the level of new construction orders for commercial property remains historically low, GVA notes in its latest Economic and Property Market Review. But with occupier demand remaining subdued, vacancy levels are still rising in many UK markets, it adds.
Demand for high-quality space is set to increase significantly as the economic recovery “gets a firmer footing” in the second half of GVA’s five-year forecast period. Among the various reasons for this growth in demand are a high number of lease expiries; the change to regulations meaning that it will probably not be possible to lease a building with an EPC rating below E after April 2018; and the changing retail environment as internet sales grow in importance. The low level of development activity as this demand for prime space builds indicates that a future market imbalance is being stored up, GVA says, with the gap between London, the South East and the rest of the UK continuing to widen and the market becoming increasingly segmented by location and by asset quality.
The firm has marked down its view on expected rental growth rates as the short-term outlook for the UK economy has deteriorated over the past three months. It now expects almost no change to all-property average rental values for the rest of this year and in 2013. However for available Central London commercial property GVA expects more upward pressure on rental values than in the rest of the UK, and forecasts that rental values for Central London property will have risen almost 15% from current levels by the end of 2016. Away from Central London, GVA thinks rental values will rise about 6% over the same period.
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