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United Kingdom Real Estate Report Q4 2010
Business Monitor International, Sep 2010, Pages: 58
It appears that 2010 marked the nadir in the fortunes of the UK’s real estate sector. When the authors interviewed them in the middle of the year, their in-country sources indicated that rents and yields had stabilised in London, Manchester and Glasgow – and across all three sub-sectors. In London, for instance, rents have risen by 5-8% in the office and retail sub-sectors and by a little more than this in the industrial sub-sector. Their sources are looking for a 5-10% rise in rental rates, across the board, in 2011.
However, it needs to be remembered that this follows an annus horribilis in 2009. Rental rates fell by about one-fifth in all three sub-sectors and most parts of the country. Prices and values dropped by a greater amount, resulting in net yields rising quite sharply.
The authors continue to take the view that landlords in central London may be able to benefit from the partial recovery in the fortunes of the global financial services sector. Others, outside London, may be able to benefit from the relocation of businesses from the capital to less expensive parts of the country. Overall, though, they consider that the prospects for the sector are generally uninspiring.
The principal problem is that, as a result of a long and deep recession, UK businesses are unwilling or unable to sustain paying the rental rates that were prevailing prior to 2008. It is difficult to see this situation changing for the better except at a glacial pace. The new Conservative-Liberal Democrat coalition government will be forced to pursue austere fiscal policies. Over-leveraged and still exposed to the further falls, that the authors expect, in housing prices, UK households are unlikely to increase their consumption over the next two years.
Nevertheless, there are two positive aspects that are worthy of a mention. One is that the UK commercial Real Estate sector as a whole does not appear to be exposed to a glut of new property. Vacancy rates are, in some places, running at double-digit rates, but only just. The second is that the fortunes of all UK businesses which are oriented towards export markets – be they manufacturers or service sector enterprises – have enjoyed a huge boost to their competitiveness as a result of the slump in sterling relative to most other major currencies. It is possible that it is a recovery in exports that finally changes the dynamics of the country’s commercial real estate sector for the better: in this context, the recent strength of rental rates in London’s industrial sub-sector is noteworthy.
Over the next four years or so, the authors anticipate that yields for commercial Real Estate in the UK will basically track sideways. Rental rates and capital values will, for the most part, move together.
Key Features of This Report
This is the latest edition of a new series of industry reports that seeks to identify the key dynamics of the real estate sectors of 44 countries around the world, some of which are developed and some of which are, in every sense, emerging markets. The questions that the report seeks to answer for each country remain as follows: what are the main issues that will matter to actors in and around real estate development in the country concerned, both over the long and the short term? What are the main constraints that they face? What are the key insights that one garners when one compares the real estate sector of the country concerned with its peers in other countries?
In Q3 the authors introduced a very substantial new improvement to the reports. They incorporated data and qualitative observations provided by commercial real estate agents operating in the countries surveyed. As a result the authors gained a much clearer picture of the balance between demand and supply in each of three main sub-sectors – office, retail and industrial. They also introduced a new approach to the forecasting of rental yields, which is discussed in the methodology sector of this report.
In Q4, the authors have incorporated a lot of new data in relation to rents and yields in 2010. They gained this data by way of a new round of interviews with their in-country sources in mid-2010. In some cases, the latest information from their sources has caused them to make significant revisions to their forecasts for 2011-2014. They asked their sources to indicate what growth in rents is likely for 2011. They explain their answers in the Industry Forecast Scenario.
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