Construction levels at highest in ten years, say Cluttons
Strategic property consultancy Cluttons’ latest quarterly report highlights that the UK property market is seeing an impact from both changing and consistent trends across the commercial landscape affecting retail, construction and investors in particular.
Since the start of the pandemic, retail sales are beginning to recover, with the economy picking up speed, and the departing Chief Economist from the Bank of England commenting that this was the most dangerous time for inflation in almost 30 years. However, investors are still hopeful in the yield story for real estate, albeit with marked differentiation between sectors and geographies.
Industrial manufacturing PMI is at a 10-year high, and online retailing has shown a strong demand amongst consumers with the growth of sales up 82 per cent last year. However, it has been questioned whether this trend will continue indefinitely due to the slowing down of the pandemic and strong support for independent physical stores more evident than ever. Online sales grew to a record proportion of 36 per cent of total sales in late 2020 and early 2021 but has fallen back to 27 per cent since retail has re-opened.
(Industrial) Construction levels are also at their highest in 10 years, and in the UK, there is now 58 m sq ft under construction: resulting in a significant jump of 43 per cent on levels this time last year. More specifically the Southeast has seen industrial space under construction drastically increase by 41 per cent to 10.6 million sq ft.
Sophy Moffat, head of insights and research at Cluttons, says: “Investment levels in the industrial sector have soared with prospects for rental growth a significant factor in attracting investment attention. Investors remain firmly in favour of the sector; in the final quarter of 2020, we saw that £4.6bn was invested, with investment levels continuing to remain steady and promising into 2021.”
Business expectations are the strongest they have been in six years and transport usage is back to over 47 per cent of prior Covid Levels. Speaking more generally, the consensus that has arisen since the start of the pandemic, is a preference to hybrid working and increased flexible working practices.
Nearly 82 per cent of the financial service firms surveyed by the latest quarterly PWC/CBI Financial Service are implementing a hybrid work strategy. The month of September will be particularly important to see how many people will return to work or in fact continue working from home. This number will be an accurate indicator of how the trend will continue, and how commercial properties may be used.
Cluttons have also experienced more businesses sitting on space and not making decisions on how they wish to occupy it; a trend that the company believes will continue over the next few months with employers and landlords adapting to the new way of working post Covid.
The Accenture/IHS Markit UK Business Outlook recorded its highest-level business expectations in 6 years in June, with the CBI/PWC Financial Service Survey reporting its largest quarterly increase in business volumes since 2017.
It has also been predicted that small offices in local high streets could also grow in popularity, as more and more people mix and match the hybrid working model. Furthermore, flexible space closer to home may be a part of the solution and seen as more desirable over the next few years.
There have also been key investments into the life sciences and lab spaces, including the Astra Zeneca HQ in Cambridge by Oxford Properties Group, who brought into 58,639 sq ft. This increased investment into life science facilities is set to continue as a result of the pandemic.
Nearly GBP150 billion of Covid household savings are now reportedly being injected back into the economy, and consumer confidence is the highest it’s been since 2008. The PWC Consumer sentiment survey recorded its highest score since the series began in 2008, whilst the GfK Consumer Confidence index July result is already the highest since March 2020. The opening economy shows positive signs of strengthening.
Andrew Mitchell, head of investment at Cluttons, says: “There has been a dramatic shift in sentiment from the start of the year, when many areas of the economy were in lockdown. We are experiencing a rise in opportunities for investors, with the most notable change being the demand in the life sciences sector. While this is mostly in the Golden Triangle of London, Oxford and Cambridge, we are also seeing other hotspots emerging around a 'northern arc' with Manchester and York in particular seeing deals on the table. Given the UK's prominence on the global life sciences stage, we expect this trend to continue with increased transactions and forward funding deals as a result of the wall of capital waiting to pile into the sector."
Investors with diverse portfolios in real estate investments, will also encourage a stronger performance within the industrial sector, and provide protection for those with a weaker performance in other sectors.
Regarding the office market, office configurations will need to be flexible in order to meet the demand, whilst still providing a high-quality mixed-use environment and a firm eye on sustainability criteria too.