Looking beyond the South East

• Investors that bought the tenant demand recovery story early are getting 'pay back' over a relatively short time frame. Rental improvement and reduction in voids has driven this. We expect to see more investors capitalising on short term gains as occupational markets improves.

• We have discussed this a few times here during the past six months, but it is worth reiterating the drive of investment outside of the South East.

• For UK institutions, using a 5-year average (excluding portfolio sales), 49% of UK investment, by value, had been outside of the South East. So far this year, this has increased to 55%. Historically, and unsurprisingly, overseas investors remain cautious about the regions at around 15% in last 5 years but this has increased to 20% in 2014. This increase is despite the negative of Sterling being the best performing major currency. During Q2, for all investor types, around 32% of investment was outside of the South East (Graph 2).

Click Graph 2 below to enlarge

• The markets throughout the UK will continue to recover and the Government is determined to rebalance the economic inequalities. It is a long-term solution, but the recent release of the One North report outlining the alliance of five cities - Leeds, Liverpool, Manchester, Newcastle and Sheffield and the £15 billion transport plan linking ports, airports and the city centres, is vital.

• In the South East, Crossrail has provided significant economic benefit and regeneration along its route at a cost of £15 billion. The One North £15 billion transport plan will deliver significant benefits for the north and will impact positively on the property markets. Existing owners will benefit, but we can also expect further inward investment.

Occupier confidence is the key driver

• Despite geopolitical issues, which knocks global confidence, the UK is on a strong path of occupational demand recovery. News flow, both positive and negative, has come in equal waves during the past few months including the largest wobble on Wall Street for two years during the start of August.

• However, analysts remain bullish and suggest that the corrections are due to the markets adjusting to the anticipation of higher interest rates. A recent survey shows that UK finance officers' risk appetite, which will include hiring, new products and higher property demand, is the highest for over seven years. UK property does not reflect this sentiment yet, but there is increasing levels of corporate demand, which is yet to crystallise into take-up of new/additional floorspace.

• A helpful indicator of UK tenant demand, by sector, is the IPD monthly data for void rates (Graph 3). Both the retail and industrial sectors have void rates around the 10-year average and well below the 2009 peak. The office market has behaved differently with a peak last year, but this includes stock with a high degree of obsolescence.

Click Graph 3 below to enlarge

Taken from
Market in Minutes: UK Commercial August 2014