HOW BREXIT IS COOLING THE MARKET
The commercial property market was relatively quiet over the summer and in the case of Central London, it has remained subdued into the autumn as tortuous BREXIT negotiations drag on and domestic political difficulties create daily headline news. Markets dislike uncertainty but there are investors still seeking suitable properties to buy and they are paying good prices.
In other sectors, the appetite for Industrials particularly in the South East, continues to be very strong with record low yields being achieved. Offices in the major conurbations, including Manchester and Birmingham and the larger towns in the South, are also attracting many institutional investors seeking higher returns and the prospect of better rental growth over the short/medium term than Central London. The retail market continues to be very challenging and is likely to remain so for the foreseeable future.
Over the last 3 months total returns for all commercial property were 2.6% split equally between capital growth and income return. Over 12 months to the end of September, total returns have been 9.5% with capital growth of 3.8% and an income return of 5.6%. Over the corresponding periods however, the total return performance for City offices was 1.4% and 9.2% showing that a strong performance at the beginning of the 12 months has tailed off over the last 3 months.
Against expectations however, in Q3 occupational take up in the City was 4.8m sq ft in 317 deals which was 30% up on the same quarter last year and 11% up on the long term average. These figures can be misleading however, as a couple of large lettings can distort the overall numbers. Indeed, we are finding that rent free periods on new lettings are becoming more generous and headline rents remain flat. Whilst there is no doubt that deals are being done in the 1,500 – 3,000 sq ft sector, we are aware of over 70 suites currently available in the City in this size range.
We still believe Central London will remain active in both the investment and occupational markets in the coming months, but Landlords will need to be prepared to be flexible in the terms they offer if they are to attract tenants to their buildings. In addition, strong competition is coming from the serviced office market which has become extremely active and is attracting a whole range of occupiers who want the flexibility and simplicity it provides.