The recession has hit the commercial property sector in the UK very hard – and the outlook during 2013 does not look terrific for the sector either.
However, there is a silver lining for someone to most dark clouds. If your business has reached the point where you would benefit from commercial space, you are in an excellent negotiating position.
Although there are some bottlenecks and bubbles of activity, overall the outlook for the UK commercial property market is looking flat at best, according to many forecasters. The returns on commercial property investments are pretty negligible right now when compared to equities.
The most recent IPD UK Monthly Property Index shows that the capital value of commercial properties dropped during the month of February. The capital value of both retail investments and office property investments were down 0.2%.
Consultants Delloitte undertook a ‘crane survey’ to gauge commercial property construction activity at the start of the year. Their conclusion was that outside London not a lot is happening. It is not economically viable in many parts of the UK to build new office stock. London will follow a different trajectory to the rest of the country. Delloittes expects overseas investors to spend more than £20 billion on UK real estate in 2013, much of that in London.
Money Observer forecast in January that office property rents will drop by around 3% during 2013. They expect the retail property sector as remaining pretty flat.
The retail sector outside London has been hit particularly hard – as evidenced by so many empty retail units on High Streets up and down the land. It isn’t just the recession that is causing this. The rise in internet-shopping has hit the retail property sector hard. Online sales at John Lewis, for instance, now account for over 25% of the retail group’s business. That’s an awful lot of of customers and potential customers who don’t need to enter the High Street for their food mixer or TV. As the numbers of smartphones in the hands of consumers grows, the proportion of shopping done online is expected to grow.
In the recent budget, the government committed to consult on plans that would make it easier for developers to convert unwanted retail units into homes.
There are commercial property companies like Swift Capital that seem to have deep enough pockets to see opportunity in this tough environment.
Time for innovation?
Others are calling for innovation as the route out. Delloittes proposed one way to improve the economic viability of office development outside of London – simpler, cheaper buildings. They argue that today’s office buildings don’t need some of the expensive infrastructure that has become standard.
There has been a blurring in the distinction between personal IT and IT for work. Smartphones and laptops are so common nowadays, that much of the cabling for IT and communications in office buildings is no longer a necessity, they argue. That infrastructure is being replaced by WiFi and bring-your-own-device-to-work schemes.
Savings could also be made on expensive heating and cooling systems if businesses would forego the large open-plan workspaces that have become the norm. The argument is that these spaces may also be out of date. Hot-desking and teams that only come together for given activities are also changing what businesses need from office spaces. Increased availability of smaller spaces with lower operational and maintenance costs would surely be welcomed by small business owners. Perhaps the government’s relaxation of planning rules will lead to some innovation in this area.
There are other reasons to hope that things may get better sooner. The government’s commitment to regional development may provide a boost to the entrepreneurs who are undoubtedly waiting for their opportunity. However, the Coalition Government’s original attempt at a Regional Growth Fund is widely considered to have failed.
Delloittes “heroically” predict that the commercial property market will bottom out in 2013. However, Delloitte’s are not slow in adding caveats to their heroic prediction. Any recovery could be swiftly derailed.
The halving of growth expectations for UK GDP from 1.2% to 0.6%, just announced by the Chancellor, may further dampen tenant demand and rental growth. As things stand, there is too much supply chasing too little demand.
If you are one of the companies that will manage to expand during 2013, and Delloitte’s are correct, now could be the time to grab your bargain.