commercial property lambert smith hampton

Viewpoint - 25/06/2014

UK Monthly View: rents increasing as recovery continues

The UK economy continues to outperform in comparison with the other G7 countries.

Find out more

The latest GDP data confirms that it grew by 3.1% in the 12 months to Q1 2014. The most positive news though is that the growth is based on increasingly solid foundations.

Total business investment increased by 8.7% between Q1 2013 and Q1 2014 and by 2.7% between Q4 2013 and Q1 2014. Therefore, it is reassuring that the increased business confidence, as indicated by the various survey data, is feeding through in to the real economy.

Employment rising, but wages stagnated

Despite the strong growth in employment, there still looks to be slack in the labour market, which is translating into low wage growth. April’s numbers show total employment at 72.9%, up from 71.5% in comparison with April 2013; however, wages only increased by 0.7% in comparison with 12 months previously.

There are some one-off taxation reasons why there was a drop in comparison with March’s figure of 1.9% p.a., but overall, it does show that there is not enough pressure being exerted on employers to increase wage settlements.

Interest rates will likely increase soon

One of the most important questions for the property industry is when will the MPC finally increase the base rate. It had been thought that this will not be until 2015, but Mark Carney’s speech at the Mansion House on June 12, has raised the prospect of a rise “sooner than markets currently expect”. The markets therefore, have quickly moved on to price in a rate rise of 0.25% before the end of 2014, which now appears likely given the context and content of the Governor’s speech.

Rents increasing in London

In Central London, office rents continue to grow on the back of growing demand for office space from a wide variety of occupiers: office-based employment in London increased by 7% in the 12 months to April and the forecasts show this trend is going to continue.

The construction figures show a spike in London office completions in 2014 and of this around 2m sq ft is still available. However, relatively strong levels of occupier demand mean this should not negatively impact on the prospects for rental growth. Completion levels will also drop to something approaching a nine year low in 2015, which also lessens any chance of oversupply.

Regional recovery

The momentum in the occupier markets outside Central London continues to build, albeit slowly. The markets in the South East and the best performing cities are showing positive signs and average rents are growing, but this is not true across the board. Whereas in the capital markets, total investment in regional property has increased substantially over the last 12 months.

This is in response to the improvements in the economy, the weight of money chasing property as an asset class and the expense of London; however, there are some worries that the investment market is now running slightly ahead of the occupier market.  Weighted average transactional yields in the first six months of 2014 for regional offices are 6.8% and for industrial are 6.7%. This is low on a historical basis and shows investors are having to price in rental growth in order to achieve required returns.


Get the latest insight, event invites and commercial properties by email