Viewpoint - 28/02/2014

UK Monthly View: the good news continues

The good news regarding the performance of the UK economy has continued into 2014.

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The Bank of England’s latest inflation report illustrates this: they have forecast economic growth in 2014 will be 3.4%, well above the consensus forecast of 2.6-2.7%.

Interest rates likely to remain low

Having previously indicated that the Monetary Policy Committee would consider raising interest rates when unemployment reached 7%, Mark Carney has stated the Bank is now abandoning this method of forward guidance (the latest numbers show unemployment has fallen much faster than anticipated and is now at 7.1%). In light of the spare capacity in the labour market and the various global economic headwinds they still believe that interest rates “may need to remain at low levels for some time to come”.

Business investment set for major expansion

With the news regarding the overall performance of the economy remaining positive, the main point of interest is whether business investment and trade will start to replace consumer expenditure and the housing market as the drivers of economic growth.  Both business investment and export performance have disappointed of late, despite the improvements in business confidence and the economic outlook in our main export markets. The export outlook is set to remain uncertain but all the surveys indicate that we will see a major expansion in business investment this year. The latest numbers from the BDO business trends survey shows confidence at a 22 year high and we would expect this confidence to translate in to higher investment levels in 2014.

Dramatic increases in property investment

The property market has responded to the improvements seen in the economy since early to mid 2013. The first movement was seen in the investment markets, where volumes increased exponentially between Q2 and Q4, finishing 2013 at a seven year high of £45bn.

The rapid change in the markets was reflected in the performance numbers from IPD: quarterly total returns quadrupled between Q1 and Q4, going from 1.1% in Q1 2013 to 4.4% in Q4 and the total return figure for 2013 was 10.5%. On an aggregate level, this improvement in performance was investor rather than occupier driven, as yield compression played the largest part in boosting total returns in the third and fourth quarters of the year.

London continues to perform best

As was the case in 2013, the best performing markets were in Central London. Central London retail returned 18.1%, as did inner London offices, while both the West End and Midtown returned 16.4% over the year. The worst performing segments of the market were regional shops and offices, which returned 4.3% and 5.3% respectively.

Is the invesment market out of sync with the occupier market?

Indeed, the rapid increase in investor demand in the second half of 2013 has led to some worries that the investment market has got out of sync with the occupier market, where the improvement in performance has not been quite so marked. However, there are encouraging signs that that the regional markets are on the mend: industrial take-up increased by 22% in 2013 and office take-up increased by 32%. In addition, average regional office rents returned to modest growth in the second half of 2013 and some markets like Cambridge and Edinburgh have seen double digit increases in prime rents over the last 12 months as well.


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