London's commercial property market Bank of England Philip Hammond
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RICS: Surveyors sense a downturn of commercial property market

The Brexit impasse is contributing to perceptions that the commercial property market is in the downturn phase of the property cycle, the RICS UK Commercial Property Market Survey has revealed.

Figures for Q3 2019 showed that 62% of surveyors sensed the overall market is in a downturn phase of the property cycle.

Brexit was suggested as having an increasingly detrimental impact on market activity.

Tarrant Parsons, economist at RICS, said: “Although a clear majority of respondents now perceive the market to be in a downturn, the fact that capital value expectations are still positive in many parts of the country suggests a relatively soft landing for the commercial real estate sector is anticipated overall.

“It remains to be seen what impact the latest Brexit developments have on confidence across the sector, but with the picture unlikely to become clear until into the New Year it may well mean hesitation continues over the near term.”

Tenant demand reportedly fell at the headline level with the net balance slipping to -19%.

Interest in the commercial property market fell at a faster pace last quarter with -15% more surveyors seeing a fall in investment enquiries.

By Michael Lloyd

Source: Mortgage Introducer

Scottish commercial property
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Demand for commercial property at lowest level since 2012, says industry report

Demand for office space in the South West has slipped to its lowest reading since September 2012, the Royal Institute of Chartered Surveyors’ UK Commercial Market Survey has revealed.

The survey added that the current impasse over Brexit is contributing to perceptions that the South West commercial property market is in the downturn phase of the property cycle.

The RICS report for Q3 2019 said that enquiries from investors are down at headline level and that 53 per cent of respondents believe that the market to be on a downward trajectory.

Occupier demand in the South West fell at the headline level once again, with the net balance slipping to -19 per cent, the lowest reading since June 2012.

Once again, the retail sector continues to drive the overall decline (net balance -62 per cent, compared to -54% in Q2).

However, demand for South West office space also fell during Q3, with a net balance of -8 per cent compared to -1 per cent in Q2.

Demand for industrial space has a net balance in the region of +12 per cent.

The region’s retail sector continues to have large numbers of vacancies coming to market, prompting another increase in incentive packages on offer to prospective tenants.

Inducements are also on offer in the office sector with 17 per cent of respondents reporting a rise in the packages.

South West respondents to the survey project that rents for the coming three months are expected to rise in the industrial sector, the only sector to see any notable interest from tenants.

Unsurprisingly, the retail sector isn’t expected to improve, some 63 per cent of respondents in the region expect to see further reductions in rents across the market.

Across the UK, retail rents are reading at the lowest level since the financial crisis (Q1 2009).

Looking further ahead, local respondents expect prime and secondary retail rents to fall for the year ahead.

The outlook has turned negative for secondary office rents in the South West, driven by weakening expectations in London.

By way of contrast, the industrial sector continues to return rental growth projections for the coming 12 months in the region.

Interest in investing in the local commercial property market fell again this quarter, with -5 per cent more South West respondents seeing a fall in investment enquiries.

Overseas investment demand also declined across the sectors with a net balance of -9 per cent of respondents seeing a fall.

Tarrant Parsons, RICS Economist, said: “Although a clear majority of respondents now perceive the market to be in a downturn, the fact that capital value expectations are still positive in many parts of the country suggests a relatively soft landing for the commercial real estate sector is anticipated overall.

“That said, the fallout for retail is altogether more severe. It remains to be seen what impact the latest Brexit developments have on confidence across the sector, but with the picture unlikely to become clear until into the New Year it may well mean hesitation continues over the near term.”

Martin Smalley of Gleeds in Bristol added: “Brexit unsurprisingly has created an atmosphere of uncertainty in the regions.

“There are however hotspots around areas of significant infrastructure investment like Hinckley Point C which is fuelling growth across the commercial, retail, industrial and residential sectors.”

By James Young

Source: Punchline Gloucester

commercial property UK economy
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An alternative future for commercial property

DIVERSIFICATION throughout commercial property portfolios, by private and institutional investors, is a long-standing tactic but has tended to centre around a select number of core commercial real estate classes.

That has changed in the post 2008 environment, as the industry has seen a growing appetite from investors in ‘alternative commercial property assets’ and the rise in levels of investment in these asset classes across the UK and Ireland is starting to be felt north of the border here in NI.

Figures announced for the UK mainland at the start of this year show that in the first quarter of 2019 investment in these alternative real estate assets, such as hotels, private residential, student accommodation and care homes, reached a record 42 per cent share of the overall UK investment market for the quarter. Analysts report that this has been the highest share on record following 29 per cent and 35 per cent growth in this sector in quarters three and four 2018.

The proportion of Northern Irish investment transactions that fall into the alternative category doesn’t presently come close to this level, but there is no doubt that alternative property assets are increasingly piquing the interest of those investing in the province.

The proliferation of hotel investments in Belfast city centre across the past 24 months is well documented, in parallel with heightened investor interest in student accommodation as the Ulster University campus takes shape on Royal Avenue.

Unfortunately, the unexpected delay of construction at the university campus served to cool the later for a time, but several significant student accommodation schemes are now nearing completion with others coming online as the construction of this vibrant new part of Belfast city centre proceeds.

Other ‘alternatives’ including build-to-rent schemes that facilitate city centre living as well as alternative uses of traditional retail spaces that incorporate leisure facilities, entertainment and community alongside healthcare provision are becoming increasingly attractive to investors in the province as the The Belfast Agenda strives to make Northern Ireland’s capital home to an additional 66,000 people by 2035.

Residential letting schemes in Belfast with concierge services, gyms and residents’ lounges may be a novelty today but based on the wider UK and Irish markets the time when these represent a solid investment, even for the risk-averse institutional investor, might not be too far away.

Markets are changing, as are attitudes, incomes and the priorities of the people in general. Almost 25 per cent of UK households are expected to be living in rented accommodation by 2030, so it is unsurprising as models like build-to-rent start to become more common other ‘alternative’ investment options will follow suit.

By Declan Flynn

Source: Irish News

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Commercial property sales fall for second quarter but Glasgow bucks trend

Commercial property sales values in Glasgow surpassed those of Scotland’s capital for the first time since 2015, new research has found.

Analysis of Q2 2019 data by the Scottish Property Federation (SPF) showed that the total value of commercial property sales in Scotland continued to fall.

At £614 million, sales were the lowest in five years. While sales values fell, the number of transactions increased, indicating a decrease in higher value transactions rather than a lack of activity.

However, Glasgow broke from the national trend with the total value of commercial property sales rising against both the previous quarter and the same quarter in 2018. Sales in Glasgow totalled £172m for Q2, accounting for 28% of Scotland’s total commercial property sales.

Edinburgh lost its dominance to Glasgow in Q2 2019, following a significant fall in the total value of commercial property sales. At £108m, Edinburgh’s sales values decreased by £156m on the previous quarter and £14m on Q2 2018. The proportion of Scottish commercial property sales located in Edinburgh fell from 35% in the previous quarter to just 18% for Q2 2019.

SPF director David Melhuish said: “Glasgow was very impressive this quarter, outperforming Edinburgh for the first time in four years against a wider Scottish market that saw a reduced value of sales activity.

“Glasgow’s sales increase was fuelled by a number of £5m-plus deals, totalling £129m, whereas Edinburgh only secured £33m in the same category.

“A notable feature of Scottish commercial property investment in the Q2 period was the rise of capital sourced from Asia, which topped £250m for the first time on record, according to CoStar data.

“Ryden reported a standout £48m transaction for a Korean client of Knight Frank Investment Management.”

Source: Scottish Construction Now

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Commercial rent disputes drop to five-year low in Scotland

The number of commercial rent disputes reaching a third party in Scotland fell to its lowest level for more than five years, according to analysis from Knight Frank.

Figures obtained by the independent commercial property consultancy from the Royal Institution of Chartered Surveyors (RICS) showed that the number of cases being referred to third-party dispute resolution dropped from 169 in 2017 to 123 in 2018 – down just over a quarter, 27.2 per cent.

This is less than half, 42.1 per cent, of the 292 cases that went to independent assessment in 2016. It is also below the figures for 2015 (155), 2014 (125), and 2013 (147).

Independent experts or arbitrators are appointed to cases where commercial tenants and landlords cannot agree on a new rental agreement at a fixed-term rent review date. Typically, these are conducted every five years, depending on the terms of an occupier’s lease.

Most reviews state that the rent can only increase – not decrease. This is distinct from lease renewals, where the parties can agree whatever rent deemed appropriate, subject to prevalent market forces, local supply-demand dynamics, along with other factors.

Andrew Hill, partner at Knight Frank, said: “In the aftermath of 2008, most businesses became used to their rents reducing or staying the same. However, in 2016 we saw a spike in the number of third-party applications, as the market showed continued improvement and landlords in turn became more bullish in their aspirations on rental growth. This was disputed by tenants who had become accustomed to rent stagnation.

“Since then, the occupier market in Scotland’s central belt has become even tighter for both offices and industrial premises. Despite a challenging macro-economic environment, sentiment has continued to improve and there are real constraints on availability. As a result, it looks like we have hit another tipping point: generally, businesses appear more minded to accept rent increases provided there is compelling comparable evidence, as quality space remains at a premium.”

The numbers come against the backdrop of a tightening supply of available office and industrial commercial property space.

In Edinburgh, office lettings completed between January and March 2019 saw Grade A availability fall to only 235,000 sq. ft. – the equivalent of just one year’s Grade A take-up. Knight Frank predicted that, combined with other factors, this will drive prime office rents to £36 per sq. ft. by the end of 2019.

Despite a below-average first quarter for take-up in Glasgow, new Grade A availability – excluding refurbished properties – fell to 33,353 sq. ft. Headline prime office rates currently sit at £32.50 per sq. ft. in the city centre for new accommodation and £30 per sq. ft. at refurbished premises.

Mr Hill added: “Another factor at play is the risk and cost associated with pursuing a third-party award or determination. Arbitrators can attribute near all the third-party cost to the unsuccessful party, which can be a real sting in the tail for an organisation challenging and then losing a case against a rent increase. That can be a real deterrent at a time when much of the comparable evidence supports rent increases in prime locations.

“Of course, it’s not the case across the board. Retailers located beyond the main thoroughfares, in particular, are mostly seeing rents stagnate or even go into reverse. Prime offices and industrial, however, are still subject to a real lack of available space which, all things being equal, should put upwards pressure on rents for the foreseeable future.”

Across the UK, RICS said it had seen an average 6 per cent rise in commercial rent review applications from 2013-2017, while there was a 12 per cent decline over the last 12 months.

A spokesperson for RICS commented: “The commercial rent review market moves with how the economy behaves – the last 12 months have been challenging for the sector.

“There is a significant change in retail habits with increased demand for online purchases, large retailers falling into administration, underperforming retailers being bought out – some at low-cost – and retailers merging operations. Overall, there is a desire for shorter leases and the commercial market has seen parties move towards lease renewals.”

By Andrew Hill

Source: Scottish Legal

Prime UK commercial property
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Prime UK commercial property rents increase 0.1% in Q1 2019

UK prime commercial property rental values increased 0.1% in Q1 2019, according to CBRE’s latest Prime Rent and Yield Monitor. At the All Property level, prime yields moved out 6bps over the quarter. Overall results in both prime rents and yields were driven by the continued outperformance of the Industrial sector.

Q1 2019 marked the ninth consecutive quarter of Industrial outperformance, with prime rental values increasing 1.0%. This is the sector’s lowest quarterly growth in prime rents since Q4 2015 as the stellar increase of 8.3% p.a. over the previous three years slows to more trend levels. Industrials in the North West reported the biggest increase in prime rents over the quarter (4.3%). Industrial prime yields were stable overall in Q1 2019. At the regional level, Scotland reported a -15bps decrease in prime yields while the Yorkshire & Humberside and North East markets reported increases of 29bps and 25bps respectively.

At the national level, High Street Shop prime rents fell -1.0% in the first quarter of 2019. This was an acceleration of the falls reported in Q3 (-0.4%) and Q4 (-0.4%) of 2018. Shopping Centre prime rents fell ‑1.3% over the quarter, while Retail Warehouse prime rents decreased -1.0%. Overall, High Street Shop prime yields rose 12bps in Q1. Prime Shopping Centre yields increased 12bps over the quarter. Retail Warehouse prime yields rose 25bps.

Office prime rents increased 0.6% overall in Q1 2019. Sector results were pulled up by the Central London (1.0%), Eastern (1.1%), Yorkshire & Humberside (1.2%), and North West (2.1%) markets. No UK region reported a decrease in prime Office rents in Q1. Prime yields for the Office sector were relatively stable overall in Q1 (+1bp).

Robin Honeyman, Senior Research Analyst at CBRE UK, said: “Falls in the Retail sector pulled down the All Property results in Q1 2019, despite the relative strength of Office and Industrial performance. Our Prime Rent & Yield data continues to show prime Retail coming under pressure, both in pricing and rental values.”

By David Tran

Source: SHD Logistics

London commercial property
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Non-EU investment in London commercial property rose 75 per cent in 2018

Purchases of London commercial property by non-EU investors soared last year, rising 75 per cent on 2017.

But investment from within the EU dropped sharply, according to figures from real estate research company Datscha.

Non-EU investors racked up £8bn in purchases in 2018. That was almost 10 times the amount spent by their European counterparts, who spent £885m, representing a 68 per cent fall on 2017.

Asian and US investors were the biggest spenders. South Korean investors led the way, forking out a total of £2.4bn.

Investors from China and Hong Kong made over £2.3bn in purchases, a fall of more than two-fifths on the previous year. Their reduced spend is likely due to Chinese government restrictions on overseas investment.

Wework and Colony North Star’s share in the £580m purchase of Devonshire Square helped North American investment double to more than £1.26 billion.

Other sources of investment included buyers from South Africa, Israel and Saudi Arabia. Office space accounted for 95 per cent of overseas commercial investment.

The market for commercial property in the City was “influenced by the UK’s political uncertainty and weakening of sterling”, said Lesley Males, Head of Research at Datscha.

“This has still brought positive interest in the City of London from a number of overseas buyers wanting a stakehold in what we believe is an ever-appealing investment zone,” she added.

By Michael O’Dwyer

Source: City AM

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Wealthy overseas investors snap up Scottish property

Scottish commercial property attracted more investment last year from wealthy overseas investors than France, Japan and South Korea, according to new research.

Releasing its latest Wealth Report, property consultancy Knight Frank said its analysis had found that total investment from “internationally-based ultra-high-net-worth individuals” in Scottish commercial property totalled some $376.3 million (£283.6m) in 2018.

The figure for France was about $360m, Japan came in at $110m, while South Korea was just $10m. Scotland was placed eighth globally for cross-border private capital investment in commercial property, such as offices, shops and industrial sites, behind Canada at $770m.

The UK as a whole, including Scotland, topped the overall rankings at just over $8 billion, followed by the US at $7.4bn. Knight Frank said that total private investment in Scottish commercial property, which includes UK buyers, was £760.4m last year, a 26.3 per cent increase on 2017.

Private investors represented about 30 per cent of the more than £2.5bn that was invested in commercial property in Scotland during a “resilient” 2018, the firm noted.

Recent high-profile deals involving private investors have included Jenners’ historic department store on Edinburgh’s Princes Street, which was bought by a Danish investor for £53m, while the property company of Inditex fashion group founder, Amancio Ortega, acquired 78-90 Buchanan Street in Glasgow for £31m last year.

Alasdair Steele, head of Scotland commercial at Knight Frank, said: “Commercial property in Scotland offers solid returns for investors – particularly individuals, who can expect to see the value of their capital eroded by inflation if they keep it in the bank.

“There is a strong appetite for investment outside of London and Scotland is perceived as being relatively good value, even within the UK.

“Both Glasgow and Edinburgh offer compelling supply-demand dynamics and attractive yields. All things being equal, we expect that to drive rental growth over the next couple of years and, therefore, the potential returns to landlords.”

William Mathews, head of capital markets research at Knight Frank, added: “We expect that the appetite from private investors for commercial property will continue to increase as the number of wealthy individuals grows.

“Our latest Wealth Report shows that 21 per cent of ultra-high-net-worth individuals plan to invest in commercial real estate in 2019.”

By Scott Reid

Source: Scotsman

office
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Sharp rise in property values for UK’s top shared office space providers

The value of property owned by the UK’s biggest shared office providers soared by more than a third last year.

In a sign of the growing flexible workspace market, the value of the industry’s top ten share office providers’ property jumped 35 per cent to £13.6bn last year.

The new data, released by real estate law firm Boodle Hatfield, also underlined the growth in demand for shorter leases among major companies, with the 2017 average length for a new commercial property lease standing at 7.1 years on average, compared to an average of 25 years in 1987.

Rising appetite for such short leases and shared office spaces has driven an increase in traditional property heavyweights experimenting in the sector, with giants such as British Land, Great Portland Estates and Landsec all looking to tap into the fast-growing market.

“Shared workspaces have now gone beyond being a cool place for media and tech startups – they are now a substantial part of the commercial property market in major cities worldwide,” according to Simon Williams, partner at Boodle Hatfield.

Williams added: “The success of WeWork has tempted some of the bigger traditional players in commercial property into the shared workspace market. The expectation is that there is still significant growth in this market in the coming years.”

Source: City AM

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London remains top gateway city in the world for commercial property investors

London maintained its position as the top city for global real estate investment in 2018, according to research published today by JLL. The report claims that investors continue to favour cities they are familiar with and that have well-established investment markets and high levels of transparency. Well-known, large gateway cities with the world’s deepest concentrations of capital, companies and talent continue to dominate the top ranks. Twelve cities–London, New York, Paris, Seoul, Hong Kong, Tokyo, Shanghai, Washington DC, Sydney, Singapore, Toronto and Munich–have appeared in the top 30 ranking every year for the past decade and account for 30 percent of all real estate investment.

The data shows that total volumes in 2018 were $733 billion, up 4 percent from 2017, the best annual performance in a decade. Cross-border purchases accounted for 31 percent of activity in 2018, close to the 10-year average, suggesting investors still have appetite to buy outside their own markets.

Expectations for 2019

JLL projects that investment activity momentum will be maintained into 2019, as real estate continues to look attractive in comparison to other asset classes. Fundamentals in real estate remain compelling, despite historic low yields, as robust corporate occupier fundamentals across most markets are leading to positive returns. As such, investment activity may slow, but only marginally from its current high, as investors look to hold their real estate exposure and become more selective in the search for assets with strong income growth.

  • The institutional real estate universe will continue to expand, driven by factors such as low volatility, diversification benefits, long-term income and an attractive pricing premium to core sectors. Asset classes such as student housing, senior living and multi-family have continued to attract more institutional money in 2018 and this is likely to continue in 2019.
  • Industrial now accounts for 17 percent of all investment, up from 10 percent in 2009. In contrast, the retail sector has seen less activity as investors adjust their investment approach to reflect changing consumer behavior. In gateway cities, the office sector tends to account for a higher proportion of investment volumes—68 percent in 2018, compared to 51 percent in global volumes.
  • The top 30 will continue to be dominated by the gateway cities in 2019. However, at the edges, investors will consider a widening range of cities in their strategies. Reflecting real estate investors’ risk appetite, secondary cities in established transparent markets, such as Osaka and Atlanta, are likely to attract more attention, as opposed to moving into entirely new countries.

Yields are now at historic lows in most markets across the globe. A sharp correction is unlikely, as there is still a significant weight of capital looking to invest in real estate, and corporate occupier market fundamentals across many markets are positive. This creates the potential for continued income growth. However, in 2019, overall investment volumes are expected to fall approximately 5 to 10 percent below the 2018 total, driven by a slightly reduced appetite from investors to sell, as well as continued selectivity in acquisitions.

Source: Workplace Insight