Viewpoint - 22/03/2013

March 2013 Monthly View

The consensus expectation is that the UK’s economy will expand by close to 1% in 2013, which would be a significantly better performance than was achieved in 2012.

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However, it has not been, in economic terms, a particularly promising start to the year. As a response to the lowering of medium term growth prospects, ratings agency Moody’s downgraded the UK’s triple-A credit rating by one notch; inflation has remained at close to 3%, which is above the Bank of England’s target rate; and survey data from the manufacturing and construction sectors indicated a contraction in activity levels during January and February.

Prior to the recent budget, the government has been coming under increasing pressure to alter tack and introduce measures to promote growth. Favourite among these was a package of short term fiscal stimulus, with extra funding for major infrastructure projects and house-building.

The chancellor, however, has held firm to his ‘plan A’ course of action. A variety of smaller measures, such as a cut in the rate of corporation tax and the new ‘help to buy’ scheme were announced, but there was an absence of any major policies designed to boost short term growth. It is likely therefore that the buck will pass to the Bank of England to provide further monetary stimulus. The minutes from February’s MPC meeting show a 6:3 split in favour of maintaining the quantitative easing programme at £375bn, but further asset purchases cannot be ruled out.

To stem the flow of bad news, February’s PMI survey for the all important services sector shows the index at its highest level since September 2012. As a forward looking growth indicator this is the most important of all the surveys and does suggest that the UK will narrowly escape another quarterly contraction in GDP when the Q1 numbers come out in mid-April.

The Property Market

IPD have now released their 2012 annual digest, which features data from over £14bn of UK commercial property. Their findings further emphasise the regional divide which is affecting all sectors of the UK market. Property located in London has outperformed on almost all measures, whereas property in the regions has underperformed: a theme we have continually emphasised over the last 12 months.

For example, Central London offices returned 9.3% in 2012, whereas the return for the Rest of the UK offices was -3.4%. For Central London offices the outperformer was the West End, which returned 10.6% over the year - the best performance of any of the UK office markets. The poorest performing office market was the West Midlands, where the total return was -6.1%.

It is the same story in the retail market where the total return for Central London shops was 14.6%, as opposed to -3.2% in the Rest of the UK. This stark divide is illustrative of the structural changes affecting the retail market. In most of the UK retailers are consolidating their footprint and moving away from the high street, in favour of the out of town centres and the internet. However, in London, the relative strength of the economy and the weakness of the pound has allowed the retail market to outperform: a trend we see continuing for the foreseeable future.


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