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Viewpoint - 21/06/2012

Viewpoint: UK Monthly View: June 2012

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Much of the economic news has concentrated on the ongoing crisis in the Eurozone.

The Greek elections of June 17 mean that the immediate threat of a Greek exit from the Eurozone has receded, as the pro-bailout party, New Democracy, received the largest share of the vote.

Spanish debts hits record high

However, the subsequent market-rally lasted a matter of hours, because attention has now switched to Spain and, to a lesser extent, Italy. Spanish bond yields have risen above 7%, which is the level at which other Eurozone countries were required to seek a bailout. Pricing for credit default swaps on Spanish debt have hit a record high, and the first three months of 2012 saw €97 billion of capital leave the country, both of which underline the nervousness surrounding the Spanish economy.

Spain has already received €100bn of bailout funds which are to be used to support its indebted banking system; however, there is the possibility that up to €450bn of Eurozone reserve funds will be used to buy Spanish and Italian bonds on the secondary market in an attempt to depress their elevated borrowing costs.

UK growth prospects weak

With all this uncertainty it is of no surprise that the UK’s growth prospects for the rest of 2012 look poor at best. The Q1 GDP figure of -0.3% was much worse than expected and the Oxford Economics forecast for GDP out-turn at end 2012 is just 0.1%.

The latest statistics show that unemployment fell by 0.2% during the first three months of 2012, to 8.2%, which demonstrates a good level of resilience given the GDP numbers. In addition, May’s inflation numbers show that CPI declined by 0.2% in comparison with April’s figure of 3%. This is good news from the consumer’s point of view, but the decline is largely due to a drop in commodities prices and therefore indicative of weaknesses in the global economy.

All property return lowest since December 2009

The latest numbers from IPD’s May monthly index show that the all property total return has slipped to its lowest level since December 2009, when it was actually negative. The level of income return has remained virtually unchanged and therefore this demonstrates there has been a further drop in capital values, which declined by 1.23% over the last 12 months.

Central London offices outperform market

In terms of the split by sector, City and West End offices are the outperformers, both of which are still providing double digit returns to investors. In sharp contrast the returns on shopping centres and regional offices are only just in positive territory, at 0.5% and 1.7% respectively.

This very accurately reflects the current hierarchy of demand among investors, which has been repeatedly highlighted in our UK Investment Transaction report, where Central London offices have been the most heavily invested in asset over the last 12 months.

The poor performance of the UK economy has fed through to the occupier markets, and May’s IPD all property rental growth figure was negative. As with the capital markets, there is a marked division between the performance of the central London office market, where rents are still growing at approximately 5% per annum, and much of the rest of the market where they are in decline, and have been for a number of months.


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