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Article 15 UK Property market - what's keeping us occupied in 2010?
Monday, 22nd February 2010
UK Property market - what's keeping us occupied in 2010?
Last year was widely labelled as a year of two halves, for the UK commercial property market and we expect 2010 to display similar characteristics. By that we mean the first half of the year could look very different to the second half. We expect the first six months to be characterised by strong positive revisions to capital values, driven by limited supply and strong demand. Then, as economic activity slowly improves, we should see some stabilisation in the occupier market and rents start to grow again.
Pointer: We need to be mindful of the strength of the economic recovery.
Less of an incentive
Since the global market correction began in 2007, commercial property rents have fallen sharply, in some sectors. Landlords were forced to offer increasingly large incentive packages, in order to secure tenants and reduce vacancy rates. Break clauses and extended rent-free periods became the norm, particularly in central London.
However, this year, through the combination of strong demand and a constrained property development pipeline, we expect to see an eventual reduction in incentive packages. There is already early evidence of this happening in the office market in central London, where incentive packages have moved back to more reasonable terms. This is a sector that looks poised to recover sooner than others, as occupiers with larger space requirements move swiftly to take advantage of the space still available and the incentive packages currently in place, before they are pared back. This won't necessarily feed into immediate improvements in rents but it is indicative of an improving occupier market. Agents are now forecasting West End rents growing from the third quarter onwards, and growth in rents in the City from quarter four.
Economic encouragement
Tenants are also taking encouragement from an improving economic outlook. As the UK economy slowly moves out of recession, tenants who had put expansion or relocation plans on hold, during the downturn, are now feeling confident. Such tenants now see this as an opportune time to move and/or increase their space requirements. It is widely acknowledged, by leasing agents, that rents have probably bottomed in the London office market, so tenants are realising it may be better to move sooner, before rents begin to rise again. So the London office sector will certainly start to see improvements this year. The outlook is more challenging for the retail and industrial sectors, however. As problems with the consumer linger during 2010 and possibly into next year, we expect limited growth in rents in these two sectors.
In summary, we foresee an improving tenant market this year. Therefore, we will look to buy funds that look to improve void levels (that can attract strong tenants), maintain good tenant relationships and capitalise on the opportunities we see emerging through the cycle. An example of a recent fund purchase, by one of our leading collective property funds, is the acquisition of a retail park in East Kilbride, purchased for £18.1 million, this is now the Fund's largest asset, at around 8% of fund value. The acquisition represents a good source of income for the Fund, provides exposure to high-quality tenants and has helped boost its average unexpired lease term to over 15 years. We are also keen on funds that offer good lease duration and do not have too many leases up for renewal, inside the next 24 months. This should give us a solid base to build returns from commercial property into our portfolio’s.
