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United Kingdom Real Estate Report Q1 2011
Business Monitor International, Dec 2010, Pages: 56
The United Kingdom Real Estate Report provides industry professionals and strategists, corporate analysts, real estate associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on United Kingdom's Real Estate industry.
It appears that 2010 marked the nadir in the fortunes of the UK’s real estate sector. When we interviewed them in the middle of the year, our 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. Our 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. We 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, BMI considers 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 we 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.
In the medium term (2011-2015) we 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.
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