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Real Estate
Deloitte Insight
Q2 2014
Rental growth set to boost returns
Property IQ
AuthorsJames GriggsInformation Unit [email protected]+44 (0)20 7303 3158
Will MatthewsResearch and [email protected]+44 (0)20 7303 4776
Property IQ is a brief snapshot of some of the most pertinent charts from the UK Property Handbook, our comprehensive quarterly review of UK property markets.
As the recovery continues, the drivers of property performance are now gradually starting to rebalance.
Yields are expected to compress further, particularly for regional and secondary property as investors look to these markets for returns. But prime yields are still under pressure too: for example, industrial space has been in notably strong demand by different investor types, and yields have fallen by around 50bps in a range of industrial and office sub-sectors since the start of the year.
UK institutional funds are playing a growing role in the investment market, spurred on by improving expectations for the economy and by the still-substantial gap between real estate and bond yields.
However, purchasing by Middle Eastern investors has been more restrained during recent months. US funds, in contrast, have become more active.
In broad terms though we expect capital growth fuelled by yield movement to slow over the next two years. Rental growth will start to become a more important driver of commercial property performance.
Take-up of new space in the central London office markets was strong last year, suppoting rental growth, while the picture is improving in the South East and most regional office centres.
Although still not visible across large parts of the sector, retail rental growth is gradually returning, and will be underpinned by improving demand from occupiers.
Sector Category Jun
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Jul‑
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Au
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ct‑0
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Ap
ri‑1
4
Shops
Prime major cities
Cathedral cities
Market town
Shopping centres
Regional dominant
Sub‑regional
Major town centre schemes
Smaller urban schemes
Retail warehouses
Parks (open A1)
Parks (bulky)
Solus
Car showrooms
Let to dealership
Let to manufacturer
Leisure parks
Supermarkets Standalone superstore
Industrial
Distribution (15 year term)
Distribution (inside M25)
Modern ind. est. (outside M25)
Modern ind. est. (inside M25)
Offices
City
West End
Midtown
West London
South East
Major cities
Out‑of‑town
Deloitte Real Estate Yield Matrix – changing sentiment towards yields on prime propertySentiment remains positive across virtually all sectors of the market
Source: Deloitte Real Estate
Sentiment indicator: n Sentiment weakening n No change in sentiment n Sentiment strengthening
The economy
GDP growth expectations rise furtherExpansion broadening out
• The economy continued to expand at an annual rate of 3.1% in the first quarter of the year and the consensus view for GDP growth over 2014 has now reached 2.9%. More encouraging still is the increased contribution coming from business investment as consumer spending loses some momentum.
• Although inflation is well below the Bank of England’s target, rapid falls in unemployment are increasing pressure to raise the base rate.
Credit availability improving, but mainly for large firms
• Recent survey results for both large and smaller firms suggest expansion is uppermost in directors’ minds. Deloitte’s latest quarterly CFO Survey shows a record 71% of corporates in favour of taking greater risk onto their balance sheets.
• The availability of credit continues to improve, although it is less of an issue for large firms than for SMEs. The Bank of England’s Q1 Credit Conditions Survey points to a weaker increase in availability of credit for small businesses. However the survey reports that the availability of lending to the commercial real estate sector rose over Q1 and is expected to grow further.
Activity grows faster in Southern regions
• Regional economic performance is also improving. PMI figures measuring private sector firms’ workloads show that activity is increasing (index above 50) in all regions. However, it is clear that regions in the southern half of the country are enjoying faster growth, and this is expected to continue as these regions contain a greater share of the job-creating sectors in financial and business services.
Changing consensus forecasts for GDP growth
GD
P gr
owth
%
2013 2014 2015
Source: HM Treasury consensus forcasts
Nov-13Jun-13
Dec-13
Jul-13
Jan-14
Aug-13
Feb-14
Sep-13
Mar-14
Oct-13
Apr-14 May-14
Forecasts made in:
0.0
1.0
2.0
3.0
4.0
North West
East Midlands
Scotland, 56.4
North East, 56.6
Yorkshire & Humber, 55.8
East Midlands, 58.2
West Midlands,58.2
Wales, 60.5
North West, 56.1
NorthernIreland,56.6
East, 58.2
London, 59.5
South East, 58.0South West, 58.8
Source: Markit
PMI Business Activity Index, March 2014
2 | Property IQ Rental growth set to boost returns
UK commercial property
Investor demand for property remains firmAppetite for investment still strong
• Over the first four months of the year, £12.9bn of investment purchases were recorded, fractionally ahead of the same period last year. Cash flows from domestic savers into property funds continue to increase steadily, reaching almost £300m in February according to the Investment Managers Association, and we see little let up in demand from across the range of investors over the rest of the year.
• Auction sales have an increasingly important role in the market; there has been a visible shift to larger lot sizes and the sold rate is up over 5% on last year.
UK funds eager to build exposure
• UK institutional funds have been notable in raising their purchasing activity over the last two quarters, and, along with UK property companies, accounted for 53% of purchases in Q1 against 43% for 2013 as a whole.
• Overseas investors, particularly those from the Middle East, have been more subdued this year, but US buyers have been significantly more active in the market.
Yields remain under downward pressure
• The weight of this demand has meant that prime yields have fallen, by a further 50bps since the start of the year for some prime office sub-markets as well as for distribution warehouses and industrial estates. Although now at a low level, we expect to see further small falls this year, particularly in the regional markets.
• Shopping centres have been in high demand, accounting for the three largest single-asset deals in Q1. In contrast to the previous quarter which saw two £1.7bn central London office purchases, the largest office deal in Q1 was Hines’ £245m purchase of 60 Holborn Viaduct in central London.
Property investment by quarter (£ million)
Q1 Q2 Q3 Q4
Source: Property Data
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Share of investment by investor type Q1 2014
Source: Property Data
Owner occupiers
Overseas investors
Private investors
UK institutions
UK property companies
Others
4% 3%
33%
7%31%
21%
Offices – major cities
Offices – South East
Offices – West London
Prime distribution 15 year term
Offices – Midtown
Modern ind estate – regional
Offices – out-of-town
Supermarkets
Leisure partks
Car showrooms
Shopping centres – major
Shopping centres – regional
Shops – market townO�ces – City
Retail parks
Shops – major cities
Fall in prime yields, year to date % (selected)
Source: Deloitte Real Estate
0.00 0.25 0.50
0
0
0
| 3Property IQ Rental growth set to boost returns
UK commercial property
Rental growth beginning to take holdRental growth to support total returns
• Rental growth will start to play a greater role in total returns as capital growth from yield compression slows. Over the first three months of the year, IPD All Property rental value growth reached 0.7% quarter on quarter, its highest level since the final quarter of 2007.
Central London offices out in front
• Over the last twelve months, the central London office markets have produced rental growth head and shoulders above all other parts of the market. Indeed a large part of the retail sector has seen falls in rental values over the period. However, even here, figures are showing a gradual improvement.
• Occupier demand for central London office space rose to its highest level since the financial crisis last year, with a significant improvement in demand for Grade A space. The TMT sector accounted for 34% of lettings last year, with professional services taking 18%.
Hiring expectations lifted further
• The Q1 CFO Survey confirmed the continuing growth in prospects among corporates, with hiring intentions over the next year reaching the highest level in the survey’s history.
• This should translate into further demand for additional office space. Over the medium term, the financial and business services sector is expected to provide a large share of new jobs created, and London in particular will benefit from this.
-1.6
-1.4
-1.2
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
All property rental value growth, month-on-month, %
Source: IPD
Mar
-14
Dec
-13
Sep-
13Ju
n-13
Mar
-13
Dec
-12
Sep-
12Ju
n-12
Mar
-12
Dec
-11
Sep-
11Ju
n-11
Mar
-11
Dec
-10
Sep-
10Ju
n-10
Mar
-10
Dec
-09
Sep-
09Ju
n-09
Mar
-09
Dec
-08
Sep-
08Ju
n-08
Mar
-08
Dec
-07
Sep-
07
Rental value growth, year to April (%)
All Property
Office: Rest of UK
Office: Rest of S East
Office: Mid Town & W End
Office: City
Leisure
Retail Warehouse
Shopping Centres
Std Retail: Rest of UK
Std Retail: S East
Industrial: Rest of UK
Industrial: S East
Source: IPD
-2.0 0.0 2.0 4.0 6.0 8.0 10.0
Outlook for capital expenditure, hiring and discretionary spending
Source: Deloitte CFO Survey, Q1 2014
-100%
-50%
0%
50%
100%
Sep-
10
Dec
-10
Mar
-11
Jun-
11
Sep-
11
Dec
-11
Mar
-12
Jun-
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Sep-
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Dec
-12
Mar
-13
Jun-
13
Sep-
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Dec
-13
Mar
-14
Dec
reas
e
I
ncre
ase
Net % of CFOs who expect UK corporates' capital expenditure, hiring and discretionary spending to increase over the next 12 months
Hiring Capital expenditure Discretionary spending
4 | Property IQ Rental growth set to boost returns
UK commercial property
Retail sector provides some encouragement
High street message improving
• The office sector does not have a monopoly on good news. Recent research by Deloitte suggests that the health of the high street may not be in as critical a condition as widely claimed. An analysis of the reoccupation rates of units formerly held by retailers that had gone into administration shows that those on high streets have fared better than those in shopping centres or on retail parks.
• Furthermore a significant proportion of reoccupied space on the high street has been taken by discount stores and supermarkets seeking to increase their presence in the convenience sector, and not just by bookmakers and charity shops.
Industrials in favour over the medium term
• Returns continue to improve: the average prediction for all property total returns in the May IPF Consensus Forecasts report was 13.7%, up from 12.1% in February.
• Supported by a superior income return element, the industrial sector is expected to produce the strongest total returns over the next five years, at 9.1% per annum according to the latest IPF consensus forecasts.
• Capital growth is expected to be highest in the office sector, bringing total returns to 8.6% per annum.
Changing demands on distribution
• Our new research paper, The Shed of the Future, discusses the impact of e-commerce on the retail logistics network. Higher customer expectations for stock availability, delivery times and collection options are forcing retailers to reassess their optimum distribution arrangements.
• As a consequence we see additional demand for mega sheds from some operators, heavy competition for urban warehousing, and changes in the type of functions warehouses are expected to accommodate.
Of the shops that were vacated
Reoccupied
Reoccupied Reoccupied
Total occupancy
occupancy
High Street
Retail Park
occupancy63%
occupancy71%
Shopping Centre
Source: Deloitte
New logistics model
Source: Deloitte
Total return outlook by sectorIPF consensus forecasts: annualised total returns 2014-18 (%)
Source: IPF Consensus Forecasts Q2 2014
Total return Income return Capital growth
0.0
2.0
4.0
6.0
8.0
10.0
IndustrialStandard RetailOfficeAll property
| 5Property IQ Rental growth set to boost returns
UK residential property
Signs of the market starting to easeHouse price rises continue
• Most regions saw a further acceleration in house prices in Q1, with notable pick-ups recorded in Scotland and the North. London has moved further away from other areas of the county, with annual house price growth of over 18% in Q1.
• Unlike in Q4, however, there are a small number of regions where price growth has fallen back.
Pace of demand growth slows
• The latest data from RICS shows that the level of enquires from new buyers is growing at a much slower rate than during the second half of last year.
• At the same time, the number of properties available to buy remains low, keeping upward pressure on house prices.
• The latest data from the British Bankers Association shows that the number of new mortgages taken out in April was 42,000, a steady fall from the recent peak of 48,000 in January. However the volume remains higher than for the same period last year.
• Market interest rates suggest new loans will become gradually more expensive, while regulations introduced in April will make them more onerous to acquire.
Construction volumes show little sign of taking off
• Improvements in the number of new homes being built have been modest and remain well below the volume in 2007.
• Demand for new houses remains firm, buoyed up by the Help to Buy scheme, but house builders are citing increasing costs – of labour and materials – as well as the lengthy planning process for holding back construction volumes.
Annual house price growth by region %
Q4 2013 Q1 2014
Source: Nationwide
0 2 4 6 8 10 12 14 16 18 20Wales
Northern IrelandNorth
Yorks & HumberWest Midlands
North WestEast Midlands
South WestScotland
East AngliaOuter South East
Outer MetropolitanLondon
Demand indicators
New buyer enquiries (LHS) Sales to stock ratio (RHS)
Dec
reas
in
Incr
easi
ng
Source: RICS
-80
-60
-40
-20
0
20
40
60
80
Mar
-07
Jun-
07Se
p-07
Dec
-07
Mar-08
Jun-
08Sep-08
Dec
-08
Mar-09
Jun-
09Sep-09
Dec
-09
Mar-10
Jun-
10Sep-10
Dec
-10
Mar-11
Jun-
11Sep-11
Dec
-11
Mar-12
Jun-
12Sep-12
Dec
-12
Mar-13
Jun-
13Sep-13
Dec
-13
Mar-14
0%5%10%15%20%25%30%35%40%45%50%
Source: NHBC
New homes started
0
10,000
20,000
30,000
40,000
50,000
60,000
Jun-
07Se
p-07
Dec
-07
Mar
-08
Jun-
08Se
p-08
Dec
-08
Mar
-09
Jun-
09Se
p-09
Dec
-09
Mar
-10
Jun-
10Se
p-10
Dec
-10
Mar
-11
Jun-
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p-11
Dec
-11
Mar
-12
Jun-
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p-12
Dec
-12
Mar
-13
Jun-
13Se
p-13
Dec
-13
Mar
-14
6 | Property IQ Rental growth set to boost returns
Recent publications
A Deloitte Insight report
The Deloitte Consumer ReviewDigital Predictions 2014
Consumer Review: Digital predictions 2014
Q1 2014
April 2014
Record risk appetiteRisk appetite among the Chief Financial Officers of the UK’s largest companies rose to a six-and-a-half-year high in the first quarter of 2014. 71% of CFOs say now is a good time to take risk onto their balance sheet, more than twice the level of a year ago and higher than the levels prevailing before the onset of the financial crisis in late 2007.
Significantly reduced economic uncertainty and much improved financing conditions have helped drive corporate risk appetite higher.
Our economic and financial uncertainty index has fallen by one-third over the last year. Easy monetary policy and favourable financing conditions have created a capital-rich environment for big UK corporates. Buoyant risk appetite means that CFOs are likely to draw down on that capital. CFOs report that credit is more available, and more keenly priced, than at any time in the last six-and-a-half years. Expectations for equity issuance and bank borrowing have seen a strong recovery since the lows in late 2011.
The default position of large corporates in the past six years – bullish on emerging markets, cautious on developed markets – seems to be reversing.
CFOs have become more confident about growth in developed economies, particularly the UK. CFOs increasingly see growth here in the UK, and established markets such as the US and euro area, as the key drivers of their corporate investment plans.
Plans for all forms of corporate spending – hiring, capital spending and discretionary spending – are at new three-and-a-half-year highs. A record 95% of CFOs expect merger and acquisition activity to rise over the next year.
CFOs have become markedly more confident about the outlook for UK inflation. Last quarter a majority expected inflation to overshoot significantly its 2.0% target in two years’ time. Most now expect inflation to be around 2.0%. On average CFOs expect interest rates to rise by 0.25% over the next year.
Consumer spending has been a significant driver of the UK recovery so far. This quarter’s CFO Survey suggests that corporate spending will play an increasingly prominent role as the recovery matures.
The Deloitte CFO Survey
AuthorsIan StewartChief Economist020 7007 [email protected]
Debapratim DeSenior Economic Analyst020 7303 [email protected]
Alex ColeEconomic Analyst020 7007 [email protected]
ContactsIan StewartChief Economist020 7007 [email protected]
Mark FitzPatrickVice Chairman and CFO Programme Leader020 7303 [email protected]
To access current and past copies of the survey, historical data and media coverage, please visit:
www.deloitte.co.uk/cfosurvey
0%
10%
20%
30%
40%
50%
60%
70%
80%
2014Q1
2013Q3
2013Q1
2012Q3
2012Q1
2011Q3
2011Q1
2010Q3
2010Q1
2009Q3
2009Q1
2008Q3
2008Q1
2007Q3
Chart 1. Risk appetite% of CFOs who think this is a good time to take greater risk onto their balance sheets
CFO Survey Q1 2014
Retail thought leadership series
The changing face of retailWhere did all the shops go?
The changing face of retail: Where did all the shops go?
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to release this object and type the section title in the box below.
UK real estate predictions 2014Expansion mode
Real EstatePredictions 2014
M&AIndex Q2 2014
The Deloitte
Growth is back on the corporate agenda
About the Deloitte M&A IndexThe Deloitte M&A Index is a forward‑looking indicator that forecasts future global M&A deal volumes and identifies the factors influencing conditions for dealmaking. The Deloitte M&A Index has an accuracy rate of over 90 per cent dating back to Q1 2008.
>
Contacts
Iain MacmillanHead of UK M&A020 7007 [email protected]
Sriram PrakashHead of M&A Insight020 7303 [email protected]
Key points
• Deloitte forecasts a strong resurgence in deal volumes for Q2 2014, bolstered by strong economic figures from the US and Europe.
• We expect the global deal volumes to reach nearly 8,000 deals by the end of Q2 2014, up by 10% for the same period in 2013.
• More than $500 billion worth of deals were announced just in the first two months of 2014. It appears growth is firmly back on the corporate agenda.
• The S&P 1200 share price index currently stands close to its pre‑crisis high, however revenue growth has been declining since 2012. With confidence levels recovering, M&A activity provides a compelling way to enhance revenues and profits.
Figure 1. The Deloitte M&A Index
Global M&A deal volumes
Q2 2014 M&Adeal forecast
5,000
5,500
6,000
6,500
7,000
7,500
8,000
8,500
9,000
9,500
Q22014
Q12014
Q42013
Q32013
Q22013
Q12013
Q42012
Q32012
Q22012
Q12012
Q42011
Q32011
Q22011
Q12011
Q42010
Q32010
Q22010
Q12010
Quarter
Deloitte M&A Index (projection) Actual M&A deal volume (actuals)
7850
8200
M&A Index Q2 2014
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The Self Storage Association UK Annual Survey2014
34307A ra Self Storage Report.indd 1 25/04/2014 15:41
The Self Storage Association UK Annual Survey 2014
London industrialTaking stock of the capital
A Deloitte Insight Report2014
London Industrial: Taking stock of the capital
London Office Crane SurveyGearing up for the next phase of construction
Summer 2014
A
London Office Crane SurveySummer 2014
Recent research
London Office Crane Survey Gearing up for the next phase of construction
www.deloitte.co.uk/cranesurvey
2014 will see a spike in the delivery of new space but there is a very limited pipeline thereafter
45% of the space under construction is already let
The West End and Midtown are the only markets to see a rise in construction levels
There was just one new construction start in the City
Office construction is down 5% over the past six months
to 9.2 million sq ft
This survey has recorded15 new starts; lowest number since 2010
Total volume under construction by submarketMillion sq ft
0Paddington
9.2Total
0.5Docklands
0.7King’s Cross 1.3
Midtown1.6West End
0.3Southbank
4.7City
Ann IbrahimResearch Manager+44 (0) 20 7303 [email protected]
Largest available building currently under construction:
317,000 sq ft
Aldgate Tower, City
Largest building currently under construction:
700,000 sq ft5 Broadgate, City
| 7Property IQ Rental growth set to boost returns
Key contacts
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.
Deloitte LLP is the United Kingdom member firm of DTTL.
This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte LLP would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication.
© 2014 Deloitte LLP. All rights reserved.
Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Tel: +44 (0) 20 7936 3000 Fax: +44 (0) 20 7583 1198.
Designed and produced by The Creative Studio at Deloitte, London. 35712A
Alex BellPublic Sector – Local [email protected]+44 (0)20 7303 3405
Victoria SmithPublic Sector – Central [email protected]+44 (0)20 7007 8597
James GriggsInformation Unit [email protected]+44 0(20) 7303 3158
Will MatthewsResearch & [email protected]+44 0(20) 7303 4776
Anthony DugganHead of Real Estate Research & [email protected]+44 (0)20 7303 3134
Philip ParnellHead of Management and [email protected]+44 (0)20 7303 3898
Chris LewisCorporate [email protected]+44 0(20) 7303 3201
Stephen PeersHead of [email protected]+44 0(20) 7303 3260
Andy RotheryHead of Deloitte Real [email protected]+44 (0)20 7007 1847
Nigel ShiltonHead of Corporate FinanceReal [email protected]+44 0(20) 7007 7934
Russell McMillanCorporate [email protected]+44 0(20) 7303 2381
David BrownHead of Real Estate [email protected]+44 (0)20 7007 2954
8 | Property IQ Rental growth set to boost returns
