Viewpoint - 24/09/2013

September 2013 Monthly View

Optimism with regards the UK’s economic recovery has continued to improve. At 0.7%, economic growth in the second quarter of 2013 doubled in comparison with Q1, and on an annual basis the economy grew by 1.5%.

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This is an improvement in comparison with 2012, although UK output remains 3% below its pre-crisis peak. The key questions now are: how broad based is this incipient recovery and can it be maintained?

Businesses starting to increase investment levels

The services sector makes up the vast majority of the UK economic output and consequently the majority of the quarterly growth can be accounted for by ongoing growth in services. However, for the first time in over a year, both construction and production industries also made a positive contribution to quarterly growth. There are also signs that businesses are starting to increase investment levels, which has been one of the factors holding back growth.

Regarding the momentum behind the recovery, in the short term the expectation is that the Q3 GDP number will be even higher than the Q2. But, this level of growth is likely to be unsustainable in the medium term. A slow improvement in real income growth is weighing down on consumer spending and some of the weaknesses in the global economy are still having a negative effect.

Forecasts predict economy will grow by 1.4% in 2013

More long-term, the forecasts from Oxford Economics predict that the economy will grow by 1.4% in 2013, 2.2% in 2014 and 2.4% in 2015. In previous years we have had good reason to be sceptical regarding the accuracy of forecast numbers as they have been continually downgraded. However, forecasts have actually been upgraded throughout the 2013 and we would not anticipate any major downgrades between now and the end of the year.

2013 office take-up levels ahead of 2012

In line with the ongoing recovery in the economy, there have been signs of improvement in the property markets. Lambert Smith Hampton data show that nationally and regionally (excl. London) office take-up levels are ahead of where they were in a year ago. This is especially true of markets like Manchester, Leeds, Newcastle and Reading, all of which are on course to exceed 2012 take-up.

This is just starting to be reflected in the rental growth figures: while IPD report that average regional office rents were still in decline at the end of Q2, the rate of decline has slowed and the South East office market has now seen two successive quarters of rental growth. A slowing down in the rate of rental decline is starting to be seen in the other main asset classes outside of London too; although at the bottom of the pile, regional high street shops remain a poor performer.

New construction orders at a four year high

These signs of improvement are starting to feed through to the developer and investor community. ONS data show that new construction orders for offices and factories were at or close to four year highs in Q2 2013. This is not just pre-let activity and there was an increase in speculative development in the first half of 2013 too.

Investors are also widening the net in terms of geography and asset quality as they look to capitalise on the expected improvements in the occupier markets. The sale of IQ Winnersh in Reading, which sold for £245m at an initial yield of 5.8% after a very competitive bidding process, typifies this.


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