Despite global risks and uncertainties, the UK economy has continued to grow during the third quarter. The UK commercial property market has remained strong across 2014 but as investor sentiment has been the driving force, we expect the investment market to cool in 2015 as the occupier market catches up.

Internal market buoyant, exports less rosy

The estimate of GDP for Q3 shows the economy grew 0.7% in Q3. While this fell short of Q2’s growth of 0.9%, it is in line with the average increase since the beginning of 2013. Growth has become more balanced over the main industrial sectors, as both industrial production and construction output up on the previous quarter.

With employment set to grow, consumer and business confidence at a high level and real wage growth showing signs of a recovery, we expect domestic demand to remain strong. Regular weekly pay increased 1.3% in Q3 compared to the same period last year, edging above increases in the Consumer Price Index inflation.

However, the export market looks less rosy. The goods and services trade deficit widened to £7.6bn in Q3 from £6.5bn in the previous quarter. The UK recorded its largest ever deficit with Germany, one of its main trading partners, reflecting a gradual decline in exports to the country. The outlook for exporters looks gloomy over the coming months given the strong pound and weakness in the Eurozone. However, the UK’s other main trading partner, the US, is set to expand at a good pace over the next few years.

Interest rate rise coming, but when?

The recent volatility in equity markets, stagnation in the Eurozone and some softer manufacturing surveys have heightened concerns that the recovery is set to soon lose pace. Uncertainties in the economic outlook have pushed back expectations of an interest rate rise to around mid-2015.

Solid property returns

Commercial property total returns have remained strong through 2014, as the market delivered a 4.4% rate of return for the third quarter (IPD). Industrial was the top performing sector with 5.4% return, marginally ahead of offices at 5.1%, while retail continues to lag the market with a return of 3.7%.

Confidence in the occupier market

Rents have continued to grow, up 0.8% for the quarter, making Q3’s growth the strongest since 2008. Rental growth has accelerated as confidence grows among occupiers across all sectors, highlighted by the Q3 RICS Commercial Property Market Survey. The net balance of surveyors reporting a rise in occupier demand was 44%, up from 38% in Q2. This is the second highest figure reached within the survey’s 16-years. Given the increase in occupier confidence, plus the prospect of higher construction costs and reduced development lending restricting new developments, we expect rental growth to continue in 2015, especially in markets where there is already a shortage of high-quality space.

Strong performance in the regions

The regions continue to see improvements in both the investor and occupier markets. LSH UKIT data shows the volume of single asset regional investment transactions recorded in Q3 was greater than those for property located in London for the first time since Q1 2011. Driving factors include the expense of London (where initial yields are at cyclical lows), the improvement in the economy, and the weight of money in the market. Speculative investor demand in the regions is showing signs of paying off with rental growth across all the office and industrial regional markets, excluding Yorkshire and The Humber industrial.

Investor sentiment racing ahead of the occupier market

UKIT data shows investment volumes in the third quarter reached £16.3bn, the highest recorded since Q4 2013 and well above the five year quarterly average of £9.4bn. The investment market may now be slightly ahead of the occupier market and so a period of cooling is likely over 2015.