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The UK commercial property market is experiencing a three tier recovery with offices and retail living in different worlds, according to the latest analysis report. All property capital growth increased by 0.8% in May month on month, up from the 0.5% reported for April, says the Knight Frank June market outlook report. Offices saw the highest capital growth at 1.5%, and retail the lowest at 0.2% while the 12 month total return fell again to 17.6% and investment volume from January to May was £23.6 billion, up from £17.8 billion for the same period of 2014. ‘The winter and early spring were a time of deceleration for commercial property, following the heady capital growth seen in 2014. While in May IPD’s capital growth index gained momentum, the improvement was not evenly spread across the sectors,’ said James Roberts, Knight Frank chief economist. The report analysis points out that offices surged ahead, industrial achieved a less dramatic increase, and retail barely saw any improvement. Roberts explains the disparity is probably due to the fact that in recent years industrial has enjoyed a fillip in the occupier and investment market from the rise of e-commerce but that is not ‘news’ any more. ‘Possibly investors now view the internet effect as priced in, taking some of the heat out of the market. This is perhaps a healthy downwards gear change, especially as the internet is no longer expanding its market share in retail as aggressively as a few years ago,’ he explained. He also pointed out that in 2000 the office market became overheated in London and the South East, as property investors and developers overestimated the growth prospects of tech firms. ‘Hopefully what we are seeing is a soft landing for industrial following its e-commerce boom of recent years,’ he added. But he also said that explaining retail property’s under performance is, however, getting harder. ‘After all, the UK retail sales figures have been robust for some time, and the consumer has done much to support GDP growth by compensating for sluggish export demand and a retrenching government. Plus, there are the new occupier groups and shopping formats that have emerged to meet changing consumer trends, such as cafés, mini supermarkets, and click and collect. These should be compensating for problems elsewhere in the sector. Perhaps the explanation is to be found in leasing market fundamentals,’ he explained. So far this year the UK shop vacancy rate has hovered around the 13% mark according to Local Data Company. This is in marked contrast to the steady decline in vacancy rates in many UK office markets, particularly in London and the South East where levels are in most cases lower than in 2007. ‘These dynamics are shaping rental growth, which is reasserting itself significantly in the office market, and barely in existence for retail. Admittedly, the rental growth for London and the South East is the driving force behind the IPD office figures, but there are… Continue reading →
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