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Avison Young Q1 Economic Property Market

 

Avison Young’s latest EPMR shows that growth remains subdued as the drawn-out process to leave the EU has left the UK engulfed in a prolonged period of uncertainty, now well beyond the “official” exit date.

Whilst the delay suggests the likelihood of a disorderly exit from the EU is reduced the risk still remains. In the short-term the persistent uncertainty continues to weigh on business decisions in both the manufacturing and services industries and can often come with significant costs.

Take up in the “Big Nine” regional office markets totalled 2 million sq. ft. in Q1 2019, some 4% down on the ten year quarterly average. Sectoral activity was dominated by the private sector, professional, financial and consumer services, while for the first time in two years there has been little new activity by the public sector. With the steady level of take up and relative caution amongst occupiers there has been no movement in headline rents during Q1, although a number of cities are anticipating rental growth this year.

The challenges in trading conditions in the retail market are likely to continue this year with retailers suffering from structural shift towards online shopping, higher labour costs and declining footfall. During 2018 the number of retailers entering CVAs soared with an increasing number being larger companies with multiple stores. Similarly, 2019 is on track to be a record year for CVAs and most likely the eye of the storm.

In stark contrast to that of the retail market, performance in the industrial sector remains resilient in 2019. Strong occupier demand and limited availability has sustained robust rental growth, with average industrial rental values increasing by 3.8% in the 12 months to March, well above the office and retail sector (MSCI Monthly Index).

The UK economic backdrop has been an issue for the investment market with some investors holding off on selling in the run up to the original Brexit date. There has been reduced activity in Q1 2019, nevertheless the fundamentals of the UK property market remain the same and fewer transactions in Q1 is partially reflective of a gap between buyers and sellers pricing expectations.

Lynsey Underwood, Investment Surveyor at Avison Young, Newcastle comments: “We have seen fewer transactions in Q1 due to a lack of stock being brought to market, despite there being active demand. The prevailing uncertainty has pushed investors into two distinct camps: those looking for opportunities where they can leverage the uncertainty and acquire at lower capital values, and those adopting a ‘wait and see’ approach. As we move through the second quarter, we have seen sentiment and activity pick up as investors realise the long term fundamentals of the market remain unchanged. The North East continues to be viewed as an attractive place to invest despite the drawn out Brexit process”.

She continues: “In Newcastle, we expect challenges in the retail sector to continue as asset values remain depressed but these are under pinned by the structural change affecting this market as a whole. There is continued appetite for long income deals with 10 year plus leases. Assets like PRS, hotels and industrial remain in high demand. We have seen a steady increase in prime office and industrial rents and this, coupled with restrictive supply has helped to drive yield depression over the past 12-24 months”.