Viewpoint - 22/05/2014

UK Monthly View: employment leaps forward

The latest news regarding the progress of the economy remains overwhelmingly positive.

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On an annualised basis it grew by 3.1% in the 12 months to March 2014: this is the quickest rate of expansion since Q3 2007. Indeed, the monthly output numbers suggest that, as of the end of April, total UK GDP output finally exceeded the precession peak in Q1 2008.

Employment is increasing – although the majority are self-employed

The jobs numbers have given the most recent cause for cheer: total employment rose by 283,000 in the three months to March 2014, which is the most recorded since records began in 1971. This means unemployment now stands at 6.8%, down from 7.2% in December.

The one caveat to this is that two-thirds of the increase is in self-employed people, with the indicators showing that many remain relatively under-employed at present. Indeed, the issue of spare capacity in the economy, i.e. the size of the output gap, is one that continues to play. It is one of the reasons that growth in real wages has been so sluggish since the start of the recovery. This could act to limit consumer spending growth, although, there is little sign of that as yet.

Interest rates to remain low

Despite the apparent growing strength of the recovery, the Bank of England’s latest inflation report takes a relatively dovish tone. It states that they see no reason to tighten monetary policy in the short term, so the base rate will, in all probability, remain at 0.5% until after the General Election in 12 months time. Nevertheless, the economy is still set grow by around 3% this year.

West End and Midtown offices are top performers

The property market continues to reflect the overall improvements in the economy. The latest data from IPD’s Q1 quarterly digest shows that, with the exception of retail warehousing, rents are either flat or growing throughout the market. The stand-out performer on this measure continues to be West End and Midtown offices, where rents grew by 3% in the first quarter of the year. Despite a sustained period of growth (17 quarters) they remain 6% below the pre-recession peak in 2008.

It is encouraging that the rest of UK office sector has now seen three quarters of, albeit low, rental growth, and, after 21 consecutive quarters of decline, rents for rest of UK retail have finally started to stabilise. In the industrial sector, both the South East and rest of the UK markets have seen three quarters of above average rental growth.

Therefore, the outlook for the occupier market outside London has stabilised and is broadly positive, especially in markets where supply is starting to be restricted, i.e. some parts of the industrial markets, grade A offices in the South East and major cities. This is reflected in the investment market where investment volumes for regional offices doubled in Q1 2014 in comparison with Q1 2013.

Yields are mostly below long run average

The continued attraction of commercial property means, with the exception of retail warehouses and rest of UK offices, initial yields are now below their long run average in all market segments. The biggest disparity is in West End and Midtown offices, where, at 3.7%, yields are 150 basis points below average. With yields this low compared to both their average and risk free rate (10 year gilts are at c. 2.6%), investors are pricing in future rental growth in order to achieve required returns. Indeed, it should be noted that capital values in the West End are now back to where they were in 2007, which does suggest the market might not have too much further to travel.


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