UK GDP decreased by 0.2% in Q1 2012and news of the UK’s first double-dip recession since the 1970s is a set-back for the property industry.

Economic overview - UK GDP points to economic contraction

Against most analysts and forecasters expectations, the ONS’s initial estimate shows that UK GDP decreased by 0.2% in Q1. Various survey data had pointed towards the economy growing slightly in the first quarter of the year, but declines in output from the production industries, by 0.4%, and construction sector, by 3%, have caused this contraction. Output from the services sector actually grew by 0.1%, which is a reversal of the decline of 0.1% in Q4 2011.

There are some questions as to the accuracy of the ONS data, especially regarding the construction industry, where the contraction in a sector which accounts for only 7% of the UK economy seems to have done much to pull the UK into recession.

Double-dip recession for first time since the 1970s

Nevertheless, two successive quarters of negative growth is defined as a technical recession, and the news of the UK’s first double-dip recession since the 1970s is a set-back. This will put pressure on the government to do more to promote growth, as the economy has not grown in any meaningful way over the last 18 months, and in volume terms, GDP is back where it was in Q1 2011.

There has been a dependence upon the service sector and the consumer for economic growth, but business confidence will have taken a knock as a result of this news, and with inflation looking as though it could remain above 3% for the rest of the year, pressure on household spending will remain in place.

Investment market constrained by lack of debt

Our UKIT data (click here to download UKIT) shows that UK commercial property investment volumes remained flat on the quarter: the Q1 2012 figure of £6.85bn, a 0.7% increase in comparison with Q4 2011 figure of £6.80bn. Overall investment volumes continue to be held back by the lack of debt and the UK’s sluggish economic growth, which is preventing investors from expanding in the regions.

Investors seek safe haven of London

Over 60% of the quarterly investment volume was for London property and investors look to have relatively little appetite for anything less than prime property in the regions. Not only does this reflect the UK’s current economic situation, it also points towards which buyers are currently driving market activity. Overseas buyers were responsible for 42%, or £2.88bn, of the investment volume this quarter: of this, over 90% was in London, at a weighted average transaction yield of 5.57%.

All property transactional yield highest since Q4 2009

Average transactional yields moved out in all three main sectors, so that the all property transactional yield is at 6.98%, which is the highest it has been since Q4 2009. The best performing sub-sector was alternative and portfolios, where some large deals at sub 6% yields pushed the average transactional yield down to 5.65%. This reflects the desirability of the secure income stream provided by some of the portfolios brought to market.

The IPD monthly index for March shows that across all sectors rental values remained flat in comparison with a year ago. However, this hides significant variation by sector and geography - rents grew in Central London offices by between 4% and 5% p.a., whereas for most other sectors they actually remained flat or declined. The worst performing sector was shopping centres, where average rents fell by 2.9%.