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Commercial Property - UK - July 2019

Market Segmentation

  • Retail: Shops, shopping centres, supermarkets, retail warehouses, post offices, bank branches, hairdressers and beauty salons, cafes, take-aways, restaurants and pubs, car showrooms, and garden centres.
  • Offices: Offices, business units, data and computer centres.
  • Industrial: Warehouses and stores, factories and workshops, newspaper printing works etc.
  • Other Commercial: Bingo halls, bowling alleys, casinos, cinemas and theatres, arenas, concert halls and exhibition centres, night clubs, hotels, health farms, gyms, sports centres and swimming pools, caravan parks and holiday sites, purpose-built car parks, petrol stations, film, TV and recording studios.

“With the current outlook, both politically and economically, uncertain, risk aversion among commercial property investors is expected to remain a major trend over the foreseeable future. Property assets with long lease structures and strong rental covenants are therefore attracting attention as investors seize on opportunities to create long-term, secure, income-producing assets. This means asset classes such as warehouses, student accommodation and mixed-use assets will continue to grow in popularity.”
– Claudia Preedy, B2B Analyst

This report looks at the following areas:

  • While investors are retrenching from struggling retail sector pockets of the sector offer opportunities
  • Rapid growth in flexible workspace sector drives demand for offices

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Table of contents

  1. Overview

    • What you need to know
      • Covered in this Report
      • Executive Summary

          • The market
            • Commercial property market showed resilience in 2018 amid political and economic uncertainty
              • Figure 1: Value of UK commercial property market, 2009-18
            • Growth in investor-owned share of commercial property slows in 2018
              • Figure 2: Investor-owned share of UK commercial property market, 2014-18
            • Investors reduce exposure to retail sector, shift to industrial and alternative assets
              • Figure 3: Segmentation of the UK commercial property market, 2014-18
            • Market outlook turns more uncertain
              • Companies and brands
                • Overseas investors represent largest single investor type in the UK commercial property sector
                  • Share held by UK institutions has dropped over the last 10 years
                    • Figure 4: Holdings in commercial property market, by investor type, 2018
                  • What we think
                  • Issues and Insights

                    • While investors are retrenching from struggling retail sector pockets of the sector offer opportunities
                      • The facts
                        • The implications
                          • Rapid growth in flexible workspace sector drives demand for offices
                            • The facts
                              • The implications
                              • The Market – What You Need to Know

                                • Struggling retail sector drags down performance of UK commercial property market in 2018
                                  • Investor interest in prime commercial property remained robust in 2018
                                    • But investor interest across different assets varies strongly
                                      • Commercial property capital value expected to fall over the next two years
                                      • Market Size

                                        • Overview
                                          • Figure 5: Value of UK commercial property market, 2014-18, (£ billion)
                                          • Figure 6: Value of UK commercial property market, 2009-18
                                        • Growth in investor-owned share of commercial property slows in 2018
                                            • Figure 7: Investor share of UK commercial property market, 2014-18, (£ billion and %)
                                            • Figure 8: UK commercial property floorspace and rental value, 2009-17
                                        • Market Segmentation

                                            • Segmentation by sector
                                                • Figure 9: Segmentation of the UK commercial property market, by sector, 2014-18, (£ billion)
                                                • Figure 10: Sector share of investor-owned commercial property stock, 2018, (% of capital value)
                                              • Segmentation by investor-type
                                                • Figure 11: Holdings in commercial property market, by investor type, 2014-18, (£ billion)
                                                • Figure 12: Investor commercial property market, by sector, South East and Rest of UK, 2017, (£ billion and % of total)
                                            • Office Sector

                                              • Offices represent largest sector of commercial property investment market
                                                • Overseas investors own around half of all invested office stock in the UK
                                                  • Rapid growth in flexible workspace sector drives demand for offices
                                                    • Robust regional prime office market
                                                      • Market fundamentals for London offices remain strong
                                                        • London office supply pipeline
                                                          • Regional office supply pipeline
                                                            • Invested stock accounts for around 78% of UK office property stock
                                                              • Figure 13: Capital value of the UK office market, 2014-18, (£ billion)
                                                              • Figure 14: UK offices market, by region, 2018, (% of total)
                                                              • Figure 15: Office property transactions in Great Britain, 2014-19
                                                              • Figure 16: Central London office property transactions by investor type, year-to-date 2019
                                                              • Figure 17: Rest of UK office property transactions by investor type, year-to-date 2019
                                                              • Figure 18: UK office floorspace and rental value, 2010-17
                                                          • Retail Sector

                                                            • Prolonged period of structural change in retail sector exerts downward pressure on property market
                                                              • Oversupply of retail space is leading to many units being repurposed
                                                                • Investors reduce exposure to retail sector
                                                                  • Shopping centre developments embrace the leisure “experience” economy
                                                                    • Retail assets represent an estimated 34% of total UK commercial property market, down from 40% in 2014
                                                                      • Figure 19: Capital value of the UK retail property market, 2014-18, (£ billion)
                                                                      • Figure 20: UK retail property market, by sector, 2018, (% of total)
                                                                      • Figure 21: Retail property transactions in Great Britain, 2014-19
                                                                      • Figure 22: Shopping centre property transactions by investor type, year-to-date 2019
                                                                      • Figure 23: Retail warehouse property transactions by investor type, year-to-date 2019
                                                                      • Figure 24: Shop/supermarket property transactions by investor type, year-to-date 2019
                                                                      • Figure 25: UK retail floorspace and rental value, 2010-17
                                                                  • Industrial Sector

                                                                    • Overview
                                                                      • Momentum in rental growth is maintained in 2018
                                                                        • Investor appetite for logistics property remains strong
                                                                          • Supply-demand imbalance is driving considerable new development activity
                                                                              • Figure 26: Industrial speculative development under construction, February 2014-January 2019
                                                                            • Industrial sector continues to show strong capital value growth in 2018
                                                                              • Figure 27: Capital value of the UK industrial property market, 2014-18, (£ billion)
                                                                              • Figure 28: UK industrial property market, by region, 2018, (% of total)
                                                                              • Figure 29: Industrial property transactions in Great Britain, 2014-19
                                                                              • Figure 30: Industrial property transactions by investor type, year-to-date 2019
                                                                              • Figure 31: UK industrial floorspace and rental value, 2010-17
                                                                          • Other Commercial Sector

                                                                            • Overview
                                                                              • Investor appetite in UK hotels sector remains strong
                                                                                • UK hotel development market set for continued, albeit slower, growth
                                                                                  • Diverse leisure sector remains popular with investors, attracted by secure long-term income opportunities
                                                                                    • Capital value of ‘other’ commercial property sector up by an estimated 2% in 2018
                                                                                      • Figure 32: Capital value of the UK other commercial property market, 2014-18, (£ billion)
                                                                                      • Figure 33: UK ‘other’ commercial property market, by sector, 2018, (% of total)
                                                                                      • Figure 34: Property transactions in the leisure sector in Great Britain, 2014-19
                                                                                      • Figure 35: UK ‘other’ commercial floorspace and rental value, 2010-17
                                                                                  • Regional Analysis

                                                                                    • Regional analysis of non-domestic properties in England & Wales
                                                                                        • Figure 36: Number of non-domestic rateable properties in England & Wales, by sector and region, as at 1 April 2017, (000s and % of total)
                                                                                        • Figure 37: Rateable value of non-domestic properties in England & Wales, by sector and region, as at 1 April 2017, (£ billion and % of total)
                                                                                      • Regional analysis of commercial property transactions
                                                                                        • Figure 38: Commercial property transactions in Great Britain, by region, 2015-19, (£ million)
                                                                                        • Figure 39: Regional importance in commercial property transactions, 2016-18
                                                                                    • Market Forecast

                                                                                      • Outlook for commercial property market turns more cautious
                                                                                        • Investor sentiment wanes amid ongoing political and economic uncertainty
                                                                                          • Investor demand focused on secure income streams
                                                                                            • Expansion into alternative sectors is expected to remain a key trend
                                                                                              • Commercial property capital value growth expected to remain restricted
                                                                                                • Figure 40: Forecast of UK commercial property market, 2018-22, (£ billion at 2018 prices)
                                                                                                • Figure 41: Development of the UK commercial property capital value, 2014-18 (historic) and 2019-23 (forecast)
                                                                                                • Figure 42: Projected investor share of UK commercial property market, 2019-23, (£ billion at 2018 prices)
                                                                                              • Industrial property and alternatives expected to continue to outperform market
                                                                                                  • Figure 43: Forecast segmentation of the UK commercial property market, 2018-22, (£ billion at 2018 prices)
                                                                                                  • Figure 44: Forecast segmentation of the UK commercial property market, 2019-23
                                                                                              • The Impact of the Economy

                                                                                                • GDP growth slowed to its lowest rate for six years in 2018
                                                                                                  • Figure 45: Annual GDP growth rate, 2010-18
                                                                                                • GDP growth expected to remain subdued in 2019
                                                                                                  • Uncertainty continues to cloud businesses’ outlook
                                                                                                    • Trends in average lease lengths
                                                                                                        • Figure 46: Average length of leases, by tenant type, 2018
                                                                                                      • Business confidence remains low
                                                                                                          • Figure 47: Business confidence index, Q1 2018-Q2 2019
                                                                                                      • Market Trends

                                                                                                        • Development of commercial property yields
                                                                                                            • Figure 48: Prime market yields, by sector, 2016-19, (%)
                                                                                                          • Rental price developments
                                                                                                            • Figure 49: Prime office rents in the UK, December 2011-December 2018
                                                                                                            • Figure 50: Prime retail rents in the UK, December 2011- December 2018
                                                                                                            • Figure 51: Prime industrial rents in the UK, December 2011- December 2018
                                                                                                          • Trends in commercial property lending
                                                                                                            • The commercial property lending market has seen increased diversification and specialisation over recent years
                                                                                                              • Figure 52: Outstanding debt secured by commercial property lender, by lender type, 2018, (% of total)
                                                                                                            • New loan originations are up 12% in 2018, despite Brexit uncertainty
                                                                                                                • Figure 53: Allocation of new loans originations, by lender-type, 2018, (% of total)
                                                                                                            • Market Drivers

                                                                                                              • Economic factors
                                                                                                                • The commercial property performance cycle
                                                                                                                  • Low interest rate environment provides positive impetus for investment market
                                                                                                                    • UK Purchasing Manager Index (PMI) for Services Industries
                                                                                                                      • UK Manufacturing Purchasing Manager Index (PMI)
                                                                                                                        • Retail sales and rise in online sales
                                                                                                                          • Figure 54: Growth of value of retail sales at current prices seasonally adjusted, 2011-17, (% change on previous year)
                                                                                                                        • Other factors
                                                                                                                          • Impact of planning laws on commercial property supply
                                                                                                                            • Supply and demand factors
                                                                                                                              • Business rate revaluations contribute to increased retail store closure rates in some regions
                                                                                                                                • Non-UK investors eligible for Capital Gains Tax (CGT) from April 2019
                                                                                                                                  • Return on Property Investment
                                                                                                                                    • Figure 55: Annual property returns, by sector, 2014-18, (% change)
                                                                                                                                  • Government Hubs programme boosts regional office take-up in the short term
                                                                                                                                    • Non-residential property transactions
                                                                                                                                      • Figure 56: UK non-residential property transaction completions, by country, 2014-18
                                                                                                                                      • Figure 57: UK non-residential property transaction completions, 2013-18
                                                                                                                                    • Brexit uncertainty starts to impact commercial construction output
                                                                                                                                      • Figure 58: Long-term trend in private commercial construction, 1970-2018
                                                                                                                                      • Figure 59: Segmentation of private commercial construction output, 2014-18 (£ million)
                                                                                                                                    • Brexit effect on industrial construction output not yet evident
                                                                                                                                      • Figure 60: Long-term trend in private industrial construction, 1970-2018
                                                                                                                                      • Figure 61: Segmentation of private industrial construction output, 2014-18 (£ million)
                                                                                                                                  • Companies and Brands – What You Need to Know

                                                                                                                                    • Overseas investors represent largest single investor type in the UK commercial property sector
                                                                                                                                      • Share held by UK institutions has dropped over the last 10 years
                                                                                                                                        • REITs retrench from embattled retail sector
                                                                                                                                        • Industry Structure

                                                                                                                                          • Overview
                                                                                                                                            • Figure 62: Holdings in commercial property market, by investor type, 2018, (% of total investor-owned commercial property stock)
                                                                                                                                            • Figure 63: UK investor share and overseas investor share in each commercial property sector, 2017
                                                                                                                                          • Overseas Investors
                                                                                                                                            • Figure 64: Overseas holdings in commercial property market, by investor type, 2017, (% of total)
                                                                                                                                          • REITs
                                                                                                                                            • Institutional Investors
                                                                                                                                                • Figure 65: Holdings in buildings, property, land and new construction work by institutional groups, 2013-17
                                                                                                                                                • Figure 66: Net investment in buildings, property, land and new construction work by institutional groups, 2014-18
                                                                                                                                            • Company Profiles

                                                                                                                                              • British Land
                                                                                                                                                • Company strategy and outlook
                                                                                                                                                  • Financial performance
                                                                                                                                                    • Figure 67: Financial analysis of British Land, 2015-19, (£ million)
                                                                                                                                                  • Bruntwood
                                                                                                                                                    • Company strategy
                                                                                                                                                      • Financial performance
                                                                                                                                                        • Figure 68: Financial analysis of Bruntwood, 2014-18, (£ million)
                                                                                                                                                      • Grosvenor Group
                                                                                                                                                        • Company strategy and outlook
                                                                                                                                                          • Financial performance
                                                                                                                                                            • Figure 69: Financial analysis of Grosvenor Group, 2014-18, (£ million)
                                                                                                                                                          • Hammerson
                                                                                                                                                            • Hammerson to exit retail parks
                                                                                                                                                              • Company strategy
                                                                                                                                                                • Financial performance
                                                                                                                                                                  • Figure 70: Financial analysis of Hammerson, 2014-18, (£ million)
                                                                                                                                                                • Intu Properties
                                                                                                                                                                  • Company strategy and outlook
                                                                                                                                                                    • Financial performance
                                                                                                                                                                      • Figure 71: Financial analysis of Intu Properties, 2014-18, (£ million)
                                                                                                                                                                    • Landsec
                                                                                                                                                                      • Company strategy and outlook
                                                                                                                                                                        • Financial performance
                                                                                                                                                                          • Figure 72: Financial analysis of Land Securities, 2015-19, (£ million)
                                                                                                                                                                        • Segro
                                                                                                                                                                          • Company strategy
                                                                                                                                                                            • Financial performance
                                                                                                                                                                              • Figure 73: Financial analysis of Segro, 2014-18, (£ million)
                                                                                                                                                                          • Appendix – Data Sources, Abbreviations and Supporting Information

                                                                                                                                                                              • Abbreviations
                                                                                                                                                                                • Methodology
                                                                                                                                                                                • Further Sources and Contacts

                                                                                                                                                                                  • Trade associations
                                                                                                                                                                                    • Trade magazines
                                                                                                                                                                                      • Trade events

                                                                                                                                                                                      Commercial Property - UK - July 2019

                                                                                                                                                                                      £995.00 (Excl.Tax)