For the commercial property market, 2014 was a year of continued growth in London and the south east and, while activity levels still dwarf other UK regions, the latter have started to make up ground as the economic recovery rippled outwards.
As has been well-documented, the shortage of prime Grade A office space in London drove rents in the West End up past the £100 per sq ft milestone once again.
In other markets, such as warehousing and distribution, 2014 was also positive. The sector strengthened as more retail activity shifted online, resulting in occupiers jockeying for space in key southern distribution locations around the M25. Further in, in the crucial last mile before delivery, operators were forced to snap up almost any space available – even previously out-of-favour second hand stock – in order to fulfil consumer demand for ever faster delivery.
Approximately 6.4 million sq ft was taken up in the first half of 2014, including Waitrose’s acquisition at Magna Park in Milton Keynes where Gazeley is constructing a 938,000 sq ft national distribution centre. As developer confidence in the market was restored and demand began to outstrip supply, 2014 saw a sharp upturn in the volume of speculative development commencing across the south. According to research, in quarter two of 2014 1.8 million sq ft of speculative space was started by developers, including Prologis and SEGRO, with the vast majority in the south east.
However, not everyone has benefited from the online shopping revolution. The High Street continued to struggle and, although vacancy rates have fallen slightly, the picture in secondary and tertiary locations is still far from rosy. The cracks in the market revealed in 2008 grew, with lesser locations unable to stand the pace set by the prime retail destinations.
Looking forward to 2015, what can we expect? With warehousing and industrial clearly on an upward curve, major developers will continue their commitment to speculative development alongside increasing design and build activity. Unsurprisingly, tenant incentives will shorten further but, more significantly, strong rental growth will continue as occupiers face head-to-head competition. This trend will be mirrored in the Grade A office market in London as occupier demand drives new speculative projects. Those who took bold decisions early in the recovery will reap the benefits of strong tenant demand, leading to reduced tenant incentives and continued rises in rents. Secondary offices in robust residential markets, such as Surrey and Hertfordshire, will see continuing demand for conversion to housing or perhaps hotel use, but office buildings in less attractive locations may struggle to be re-let.
For retail property, it is likely to be another tough year, but there are signs that the bottom of the market has been reached. Unfortunately, the confidence from prime locations such as the West End, the Westfields and retail destinations such as Guildford and Tunbridge Wells is unlikely to cascade down to secondary and tertiary retail centres which will continue to struggle.
The retail market in particular had high hopes for some assistance from the Chancellor in terms of business rates relief, having been disadvantaged by the cancellation of the next rating revaluation. Unfortunately there was scant comfort from the Autumn Statement which provided only minimal reliefs to smaller occupiers at the margins.
One sector of commercial property market in which the region will continue to lead the way is automotive dealerships. New car sales continue to grow, and manufacturers – particularly those premium brands for whom the south east is a key market - are putting pressure on dealers to upgrade facilities to accommodate growing product ranges. This is driving demand for new sites, but shortages of suitable land and planning system difficulties mean that competition for good locations will remain fierce.
Unsurprisingly, the south east will continue to be the hotbed of property investment activity. 2015 will see a repeat of investors – many of them from overseas – continuing to hunt out prime assets in mainstream sectors. However, because of limited opportunities and strong pricing, alternatives in the hotel, student accommodation and residential markets will also see intense interest. Similarly, with investment opportunities in the West End and City of London more limited, we will see greater activity within the regional office market. Apart from key prime town centres, the high street retail investment market will, however, remain challenging. There will be a narrowing of the yield gap between the prime and secondary investment markets, but the broad dynamics of the market will not change with investors seeking long, secure income.
Lastly, the region’s closely-watched residential market will continue to evolve in line with the changing macro-economic situation. Volume house builders will remain largely hesitant to invest in future land supply and will continue to prefer to work existing sites through the planning process in the medium term.
However, new entrants could shake things up a bit. Institutions and funds are concentrating largely on freehold opportunities that require heavier investment but give the likelihood of greater long term returns, although difficult issues such as infrastructure delivery and phasing may diminish profits unless properly managed. Unless 2015 sees a significant rise in interest rates, the residential market will remain strong.
About the author
Colin Steele is a partner in Business Space for property and planning consultants Rapleys
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