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UK Commercial Property market report

“The overall outlook for the commercial property market is cautiously optimistic considering current economic and political uncertainties. In the short term, the market is set to be supported by continued occupier demand in key sectors, especially the industrial sector, and a relatively robust economic performance despite Brexit concerns. The investment market also continues to benefit from the lower value of sterling and low interest rates.”
– Claudia Preedy - B2B Analyst

This report addresses the following key questions concerning the UK commercial property market:

  • What are the likely implications of Brexit on the UK commercial property market?
  • How have key sectors of the commercial property market performed over the last few years?
  • Who are the biggest investor types in the key sectors of the commercial property market?
  • Which sectors of the market are most attractive to investors?
  • Where is the market headed?

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Table of contents

  1. Executive Summary

      • The market
        • Brexit concerns impact commercial property market in 2016
          • Figure 1: Value of UK commercial property market, 2010-16
        • Investors turn more risk adverse in 2016
          • Figure 2: Investor-owned share of UK commercial property market, 2012-16
        • Retail represents largest sector of commercial property market
          • Offices represented strongest growth sector over the last five years
            • Industrial property outperforms all other major sectors in 2016
              • Investors continue to be attracted to ‘alternative’ assets
                • Outlook for commercial property market is cautiously optimistic
                  • Figure 3: Segmentation of the UK commercial property market, by sector, 2012-16
                • Market factors
                  • Record low interest rates provide positive impetus for investment market, but Brexit-induced uncertainty makes investors more risk-adverse
                    • Rising inflation and continued wage squeeze to impact consumer spending in 2017
                      • Latest business rates revaluation has biggest impact on London retail and office sectors
                        • Companies
                          • Overseas investors represent the largest investor type in the UK commercial property market
                            • Institutional investors represent the second largest investor type
                              • Real Estate Investment Funds (REITs) dominate shopping centre sector
                                • Figure 4: Holdings in commercial property market, by investor type, 2015
                              • What we think
                              • Key Insights

                                  • What is the impact of Brexit on the UK commercial property market?
                                    • What is the short-term outlook for the commercial property market?
                                      • Where is the investment market headed?
                                        • Why are ‘alternative’ commercial property assets becoming more popular with investors? Which assets attract the most attention?
                                        • Introduction

                                            • Definitions
                                              • Methodology
                                                • Abbreviations
                                                  • Market positioning
                                                    • The commercial property performance cycle
                                                    • UK Economy

                                                      • Overview
                                                        • Figure 5: Forecast GDP development 2017-21
                                                        • Figure 6: UK GDP quarterly development, 2004-17
                                                        • Figure 7: UK GDP in economic downturns and recoveries since 1979
                                                      • Inflation
                                                        • Interest rates
                                                          • House prices
                                                            • Figure 8: UK House price changes, 2006-17
                                                          • Consumer spending
                                                            • Manufacturing
                                                              • Figure 9: UK manufacturing, 2014-17
                                                            • Business investment
                                                              • Figure 10: UK GFCF 2003-17
                                                            • Imports
                                                              • Exports
                                                              • Market Factors

                                                                • Key points
                                                                  • Economic factors
                                                                    • Record low interest rates provide positive impetus for investment market, but Brexit-induced uncertainty makes investors more risk-adverse
                                                                      • UK Purchasing Manager Index (PMI) for Services Industries
                                                                        • UK Manufacturing Purchasing Manager Index (PMI)
                                                                          • Retail sales and rise in online sales
                                                                            • Figure 11: Growth of value of retail sales at current prices seasonally adjusted, 2010-16
                                                                          • Other factors
                                                                            • Impact of planning laws on commercial property supply
                                                                              • Supply and demand factors
                                                                                • Latest business rates revaluation has biggest impact on London retail and office sectors
                                                                                  • Return on property investment
                                                                                    • Figure 12: Annual property returns, by sector, 2013-16
                                                                                  • Government Hubs programme to boost regional office take-up in the short term
                                                                                    • New stamp duty rates for commercial property
                                                                                      • Non-residential property transactions
                                                                                        • Figure 13: UK non-residential property transaction completions, by country, 2012-16
                                                                                        • Figure 14: UK non-residential property transaction completions, 2012-16
                                                                                      • Private commercial construction output
                                                                                        • Figure 15: Long term trend in private commercial construction output in Great Britain, 1970-16
                                                                                        • Figure 16: Analysis of private commercial construction in Great Britain, by type, 2012-16
                                                                                      • Private industrial construction output
                                                                                        • Figure 17: Long term trend in private industrial construction output in Great Britain, 1970-16
                                                                                        • Figure 18: Analysis of private industrial new construction work in Great Britain, by sector 2012-16
                                                                                    • Market Size & Segmentation

                                                                                      • Key points
                                                                                        • Overview
                                                                                          • London offices, shopping centres and retail warehouses now almost entirely owned by investors
                                                                                            • ‘Alternative’ commercial property attracting increased interest from investors looking for secure, long-term income
                                                                                                • Figure 19: Value of UK commercial property market, 2012-16
                                                                                                • Figure 20: Value of UK commercial property market, 2009-16
                                                                                                • Figure 21: Investor share of UK commercial property market, 2012-16
                                                                                                • Figure 22: UK commercial property floorspace and rental value, 2008-15
                                                                                              • Market segmentation
                                                                                                • Segmentation by sector
                                                                                                  • Figure 23: Segmentation of the UK commercial property market, by sector, 2012-16
                                                                                                  • Figure 24: Sector share of investor-owned commercial property stock, 2016
                                                                                                • Segmentation by investor-type
                                                                                                  • Figure 25: Holdings in commercial property market, by investor type, 2014-16
                                                                                                  • Figure 26: Investor commercial property market, by sector, South East and rest of UK, 2016
                                                                                              • Office Sector

                                                                                                • Key points
                                                                                                  • Overview
                                                                                                    • Overseas investors drive growth in London office sector
                                                                                                      • UK prime offices continued to attract interest from foreign buyers during 2016, supported by a weaker pound sterling
                                                                                                        • Shift away from owner-occupied offices
                                                                                                          • Investors increasingly looking to prime regional office markets for investment opportunities
                                                                                                            • London offices
                                                                                                              • Rising speculative developments likely to slow as developers cut speculative building due to market uncertainty
                                                                                                                  • Figure 27: Capital value of the UK office market, 2012-16
                                                                                                                  • Figure 28: UK offices market, by region, 2016
                                                                                                                  • Figure 29: Office property transactions in Great Britain, 2013-17
                                                                                                                  • Figure 30: Office property transactions by investor type, year-to-date 2017
                                                                                                                  • Figure 31: UK office floorspace and rental value, 2009-15
                                                                                                              • Retail Sector

                                                                                                                • Key points
                                                                                                                  • Overview
                                                                                                                    • Growth in online and multichannel retail drives structural change in retail property market
                                                                                                                      • Investor activity in high street retail up in 2016, but wanes in shopping centres and retail warehouses
                                                                                                                        • High street retail property owners continue to face considerable risks
                                                                                                                          • Central London retail property market attracts increased interest from overseas buyers
                                                                                                                            • Shopping centre investment activity rebounded in final quarter of 2016
                                                                                                                              • Shopping centre development dominated by extensions
                                                                                                                                • Occupier demand in retail warehousing driven by bulky goods sector
                                                                                                                                  • Investors return to supermarket property after a few years of muted activity
                                                                                                                                      • Figure 32: Capital value of the UK retail property market, 2012-16
                                                                                                                                      • Figure 33: UK retail property market, by sector, 2016
                                                                                                                                      • Figure 34: Retail property transactions in Great Britain, 2013-17
                                                                                                                                      • Figure 35: Shopping centre property transactions by investor type, year-to-date 2017
                                                                                                                                      • Figure 36: Retail warehouse property transactions by investor type, year-to-date 2017
                                                                                                                                      • Figure 37: Shop/supermarket property transactions by investor type, year-to-date 2017
                                                                                                                                      • Figure 38: UK retail floorspace and rental value, 2009-15
                                                                                                                                  • Industrial Sector

                                                                                                                                    • Key points
                                                                                                                                      • Overview
                                                                                                                                        • Industrial & logistics represents one of the most attractive sectors for investors
                                                                                                                                          • Industrial and logistics property sector continues to be plagued by constrained supply
                                                                                                                                              • Figure 39: Industrial speculative development under construction, May 2012- January 2017
                                                                                                                                              • Figure 40: Capital value of the UK industrial property market, 2012-16
                                                                                                                                              • Figure 41: UK industrial property market, by region, 2016
                                                                                                                                              • Figure 42: Industrial property transactions in Great Britain, 2013-17
                                                                                                                                              • Figure 43: Industrial property transactions by investor type, year-to-date 2017
                                                                                                                                              • Figure 44: UK industrial floorspace and rental value, 2009-15
                                                                                                                                          • Other Commercial Sector

                                                                                                                                            • Key points
                                                                                                                                              • Overview
                                                                                                                                                • Investor confidence has returned to hotel sector
                                                                                                                                                  • London accounts for half of all UK hotel transactions in 2016
                                                                                                                                                    • Branded budget hotels continue to drive hotel developments in major cities across the UK
                                                                                                                                                        • Figure 45: Active hotel development pipeline by grading, Q4 2016
                                                                                                                                                      • Diverse leisure sector remains popular with investors, attracted by secure long-term income opportunities
                                                                                                                                                          • Figure 46: Capital value of the UK other commercial property market, 2012-16
                                                                                                                                                          • Figure 47: UK “other” commercial property market, by sector, 2016
                                                                                                                                                          • Figure 48: Property transactions in the leisure sector in Great Britain, 2013-17
                                                                                                                                                          • Figure 49: UK “other” commercial floorspace and rental value, 2009-15
                                                                                                                                                      • Regional Analysis

                                                                                                                                                        • Key points
                                                                                                                                                          • Regional Analysis of Non-domestic Properties in England & Wales
                                                                                                                                                            • Figure 50: Number of non-domestic rateable properties in England & Wales, by sector and region, as at 31 March 2016
                                                                                                                                                            • Figure 51: Rateable value of non-domestic properties in England & Wales, by sector and region, as at 31 March 2016
                                                                                                                                                          • Regional analysis of commercial property transactions
                                                                                                                                                            • Figure 52: Commercial property transactions in Great Britain, by region, 2013-17
                                                                                                                                                            • Figure 53: Regional importance in commercial property transactions, 2014-16
                                                                                                                                                        • Market Trends

                                                                                                                                                          • Key points
                                                                                                                                                            • Development of commercial property yields
                                                                                                                                                              • Figure 54: Prime market yields, by sector, 2014-17
                                                                                                                                                            • Rental Price Developments
                                                                                                                                                              • Figure 55: Prime office rents in the UK, December 2011-December 2016
                                                                                                                                                              • Figure 56: Prime retail rents in the UK, December 2011- December 2016
                                                                                                                                                              • Figure 57: Prime industrial rents in the UK, December 2011- December 2016
                                                                                                                                                            • Trends in average lease lengths
                                                                                                                                                                • Figure 58: Average length of leases, by tenant type, 2016
                                                                                                                                                              • Shift from owner-occupied towards rented commercial property
                                                                                                                                                                • Commercial property development activity
                                                                                                                                                                  • Figure 59: Commercial development activity, 2010-16
                                                                                                                                                                • Trends in commercial property lending
                                                                                                                                                                  • Commercial property lending activity remains steady in 2016, but with increasing caution among lenders
                                                                                                                                                                    • Figure 60: Outstanding debt secured by commercial property lender, by lender type, 2016
                                                                                                                                                                  • Following two buoyant years for new loan originations, 2016 saw a decline in new loans on commercial property
                                                                                                                                                                      • Figure 61: Allocation of new loans originations, by lender-type, 2016
                                                                                                                                                                    • Loan-to-value ratios continue to edge downwards in 2016
                                                                                                                                                                    • Industry Structure

                                                                                                                                                                      • Key points
                                                                                                                                                                        • Overview
                                                                                                                                                                          • Overseas investors drive value growth of commercial property sector
                                                                                                                                                                              • Figure 62: Holdings in commercial property market, by investor type, 2016
                                                                                                                                                                              • Figure 63: Biggest investor type in each commercial property sector, 2014
                                                                                                                                                                            • REITs
                                                                                                                                                                              • Overseas investors
                                                                                                                                                                                • Figure 64: Overseas holdings in commercial property market, by investor type, 2015
                                                                                                                                                                              • Institutional investors
                                                                                                                                                                                  • Figure 65: Holdings in buildings, property, land and new construction work by institutional groups, 2010-15
                                                                                                                                                                                  • Figure 66: Net investment in buildings, property, land and new construction work by institutional groups, 2011-16
                                                                                                                                                                                • Company profiles
                                                                                                                                                                                • British Land

                                                                                                                                                                                    • Company strategy
                                                                                                                                                                                      • British Land cuts exposure to speculative developments post Brexit vote
                                                                                                                                                                                          • Figure 67: Financial analysis of British Land, 2012-16
                                                                                                                                                                                      • Land Securities

                                                                                                                                                                                          • Company strategy
                                                                                                                                                                                              • Figure 68: Financial analysis of Land Securities, 2012-16
                                                                                                                                                                                          • Great Portland Estates

                                                                                                                                                                                              • Rental value growth slows in London office market
                                                                                                                                                                                                • Company strategy
                                                                                                                                                                                                  • Figure 69: Financial analysis of Great Portland Estates, 2012-16
                                                                                                                                                                                              • Hammerson

                                                                                                                                                                                                  • Company strategy
                                                                                                                                                                                                      • Figure 70: Financial analysis of Hammerson, 2012-16
                                                                                                                                                                                                  • Intu Properties

                                                                                                                                                                                                      • Company strategy
                                                                                                                                                                                                          • Figure 71: Financial analysis of Intu Properties, 2012-16
                                                                                                                                                                                                      • Derwent London

                                                                                                                                                                                                          • Recent acquisitions and disposals include:
                                                                                                                                                                                                            • Company strategy and outlook
                                                                                                                                                                                                                • Figure 72: Financial analysis of Derwent London, 2012-16
                                                                                                                                                                                                            • A & J Mucklow Group

                                                                                                                                                                                                                • Company strategy and outlook
                                                                                                                                                                                                                    • Figure 73: Financial analysis of A & J Mucklow Group, 2012-16
                                                                                                                                                                                                                • Hansteen Holdings

                                                                                                                                                                                                                    • Company strategy
                                                                                                                                                                                                                      • Company performance
                                                                                                                                                                                                                        • Figure 74: Financial analysis of Hansteen Holdings, 2012-16
                                                                                                                                                                                                                        • Figure 75: Turnover analysis of Hansteen Holdings, by geographic segment, 2012-16
                                                                                                                                                                                                                    • Daejan Holdings

                                                                                                                                                                                                                        • Company strategy
                                                                                                                                                                                                                          • Figure 76: Financial analysis of Daejan Holdings, 2012-16
                                                                                                                                                                                                                      • SEGRO

                                                                                                                                                                                                                          • Company strategy
                                                                                                                                                                                                                              • Figure 77: Financial analysis of Segro, 2012-16
                                                                                                                                                                                                                          • Shaftesbury

                                                                                                                                                                                                                              • Company strategy
                                                                                                                                                                                                                                • Figure 78: Financial analysis of Shaftesbury, 2012-16
                                                                                                                                                                                                                            • Workspace Group

                                                                                                                                                                                                                                • Company strategy
                                                                                                                                                                                                                                  • Figure 79: Financial analysis of Workspace Group, 2012-16
                                                                                                                                                                                                                              • Bruntwood

                                                                                                                                                                                                                                  • Company strategy
                                                                                                                                                                                                                                    • Figure 80: Financial analysis of Bruntwood, 2012-16
                                                                                                                                                                                                                                • LondonMetric Property

                                                                                                                                                                                                                                    • Company strategy
                                                                                                                                                                                                                                      • Figure 81: Financial analysis of LondonMetric Property, 2012-16
                                                                                                                                                                                                                                  • Grosvenor Group

                                                                                                                                                                                                                                      • Company strategy and outlook
                                                                                                                                                                                                                                          • Figure 82: Financial analysis of Grosvenor Group, 2012-16
                                                                                                                                                                                                                                      • Standard Life Investments (Holdings)

                                                                                                                                                                                                                                          • Company outlook
                                                                                                                                                                                                                                            • Figure 83: Financial analysis of Standard Life Investments (Holdings), 2011-15
                                                                                                                                                                                                                                        • Legal & General Property

                                                                                                                                                                                                                                            • Company strategy
                                                                                                                                                                                                                                              • Figure 84: Financial analysis of Legal & General Property, 2012-16
                                                                                                                                                                                                                                          • M&G Real Estate

                                                                                                                                                                                                                                                • Figure 85: Financial analysis of M&G Real Estate, 2011-15
                                                                                                                                                                                                                                            • Market Forecast

                                                                                                                                                                                                                                              • Key points
                                                                                                                                                                                                                                                • Commercial and industrial construction output forecast
                                                                                                                                                                                                                                                  • Figure 86: Forecast private commercial construction output in Great Britain, 2017-21
                                                                                                                                                                                                                                                  • Figure 87: Forecast of private commercial construction in Great Britain, by sector, 2017-21
                                                                                                                                                                                                                                                  • Figure 88: Forecast private industrial construction output in Great Britain, 2017-21
                                                                                                                                                                                                                                                  • Figure 89: Forecast of private industrial new construction work in Great Britain, by sector 2017-21
                                                                                                                                                                                                                                                • Commercial property market forecast
                                                                                                                                                                                                                                                  • Outlook for commercial property market remains cautiously optimistic despite concerns following Brexit vote
                                                                                                                                                                                                                                                    • Outlook for investor demand remains positive, with wider UK market receiving more attention
                                                                                                                                                                                                                                                      • Investors are shifting focus to long-term, secure, income-producing assets as they turn more risk-adverse
                                                                                                                                                                                                                                                        • Investor appetite for alternative assets remains strong
                                                                                                                                                                                                                                                          • Core regional centres attract increased investor interest
                                                                                                                                                                                                                                                            • Northern Power House and Midlands Engine to support regional growth
                                                                                                                                                                                                                                                                • Figure 90: Forecast of UK commercial property market, 2017-21
                                                                                                                                                                                                                                                                • Figure 91: Development of the UK commercial property capital value, 2012-16 (historic) and 2017-21 (forecast)
                                                                                                                                                                                                                                                                • Figure 92: Projected investor share of UK commercial property market, 2017-21
                                                                                                                                                                                                                                                              • Market forecast segmentation
                                                                                                                                                                                                                                                                • Figure 93: Forecast segmentation of the UK commercial property market, 2017-21
                                                                                                                                                                                                                                                                • Figure 94: Forecast segmentation of the UK commercial property market, 2017-21
                                                                                                                                                                                                                                                              • Key trends by sector
                                                                                                                                                                                                                                                                • Offices
                                                                                                                                                                                                                                                                  • Retail
                                                                                                                                                                                                                                                                    • Industrial
                                                                                                                                                                                                                                                                      • ‘Other’ commercial property
                                                                                                                                                                                                                                                                      • Further Sources & Contacts

                                                                                                                                                                                                                                                                        • Trade associations and bodies
                                                                                                                                                                                                                                                                          • British Property Federation
                                                                                                                                                                                                                                                                            • The Association of Real Estate Funds
                                                                                                                                                                                                                                                                              • British Council for Offices
                                                                                                                                                                                                                                                                                • The Commercial Real Estate Finance Council Europe
                                                                                                                                                                                                                                                                                  • The Investment Association
                                                                                                                                                                                                                                                                                    • The Investment Property Forum
                                                                                                                                                                                                                                                                                      • Trade exhibitions and conferences
                                                                                                                                                                                                                                                                                        • RICS Commercial Property Conference 2017
                                                                                                                                                                                                                                                                                          • MIPIM UK 2017
                                                                                                                                                                                                                                                                                            • Trade magazines
                                                                                                                                                                                                                                                                                              • Estates Gazette
                                                                                                                                                                                                                                                                                                • Property Magazine International
                                                                                                                                                                                                                                                                                                  • Property Week
                                                                                                                                                                                                                                                                                                    • Property Wire