James Roberts, chief economist at Knight Frank, has offered his predictions for the UK commercial property market in 2016. According to Roberts, the following trends will be noteworthy over the course of the year:
- Greater availability of bank debt. The eurozone is still pursuing QE which we see continuing well into 2016. In contrast, the UK might be raising rates next year, and the financial markets will price in the increase ahead of the event. This could result in a carry trade that sees UK banks flush with cash from the eurozone seeking higher interest rates. In turn the origination teams at the banks will come under pressure to put the new money to work. With growing evidence of rental growth, we believe that UK commercial property could be a beneficiary should there be increased lending.
- A change in the typical buyer nationality. Recent years have seen unprecedented levels of purchases in UK commercial property by overseas buyers. We see this interest from abroad continuing, but the nationalities of the buyers will probably change. Previously, buyers from emerging market nations, like China and Malaysia, have been very activity in the market. However, the economic slowdown in China and the rout in many commodity markets, will probably have a noticeable effect in 2016. Not only do we expect less interest from emerging market buyers, we also anticipate some selling to repatriate profits. In contrast, with the US dollar strong, the market could see far more American investors in 2016.
- Faster than expected office rental growth. In central London the office vacancy rate (the amount of available office space as a per cent of total stock) is at a fourteen year low, and falling. In London’s West End district, the vacancy rate is at its lowest level since 1989. This has resulted in across the board rental growth for central London sub-markets in 2015, and an inadequate development pipeline will in our opinion result in further rent increases in 2016. Already more firms are asking the question, what back office functions can we move out of London to where rents are lower? This will transmit rental growth to regional office markets.
- Political threats to the market will grow. Some of the threats to the wider UK economy could become heightened in 2016, and have a knock-on effect on commercial property. As we draw closer to the 2017 Brexit referendum, some overseas investors may become wary of investing the UK. The experience of the Scottish referendum was that some investors were put off temporarily, although others viewed it as an opportunity to bid for assets with less competition. Those in the former camp outnumbered the latter. If the polls are pointing to a close race in the referendum, it will impact demand for commercial property. There is also the threat that should the government fail to convince the financial markets that it is adequately addressing the deficit we could see a run on the pound.
- The slow death of the office desk will continue. Ten years ago, ‘agile’ work areas in offices, like sofa areas, team space, and even games rooms, were the preserve of trendy advertising agencies and tech start-ups. In more conservative forms, agile work areas are becoming increasingly commonplace among UK firms from all industries when acquiring new offices. Companies are waking up to the benefits in communication, team spirit, and worker satisfaction, which a move away from the desk offers. Moreover, there are efficiency savings when a firm no longer allocates a desk for everyone. Agile offices will continue their rise in 2016.
