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Slow start to UK property markets predicted

‘The last 12 months have led to a sober reassessment of recovery prospects for the UK economy. It is clear now that the financial crisis and the ongoing fiscal squeeze have left the domestic economy weaker than previously expected,’ said Richard Batten, executive chairman UK at Jones Lang LaSalle.

‘Growth is likely to fall into two phases in 2012. The first six months are expected to be flat at best, with the possibility of a slight dip. But the second half should be brighter. Hard evidence on the direct economic effects of international sporting events is patchy, but they often mark a turning point in sentiment,’ he explained.

‘It is hoped that the London Olympics will provide a much need boost to confidence. This along with the benefits of another burst of asset purchases by the Bank of England should begin to have an economic stimulus after mid-2012, when activity is expected to improve, albeit fairly slowly,’ he added.

Jones Lang LaSalle’s Property Predictions also highlight that consumers will continue to bear the brunt of the fiscal squeeze in the UK. Consumer spending will be flat at best in 2012, although retail demand will hold up better, as consumers continue to target non essential services rather than high street goods for cutbacks.
It believes that there is not much more buoyancy in other sectors. Office employment will improve, though space demand will remain limited by weakness in the financial and public sectors. Manufacturing output, which had surprised on the upside in 2010/11, is expected to slow sharply.

It points out that in a risk avoiding environment, these subdued trends will continue into 2012. For occupiers, decisions are likely to be delayed as long as the economic outlook is uncertain. Until that time cost cutting, not space expansion, will dominate and leasing activity will remain subdued. The outlook is for investment volumes to remain thin also in the early part of 2012, with activity propped up by equity buyers, such as private and sovereign wealth funds.

But as the economy becomes more supportive, there will be the prospect of a revival in occupier demand. With caution still the keynote, this upturn will be driven by structural demand or pre-lets in a market starved of quality supply. A recovery in risk appetite should also lift investment activity, notwithstanding ongoing shortages of debt finance. The thaw is expected to be gradual with core assets in safe havens such as London offices benefiting first.

‘This will not be a vintage year for rental growth, especially in the difficult early months. But the shortage of quality supply should continue to underpin headline rents in prime markets, albeit with incentives remaining generous,’ said Andrew Burrell, director, EMEA Research.

‘The rate of increase is set to moderate in all sectors, with prime offices, notably those in Central London, seeing the most marked slowdown in 2012. Average rents have not seen as strong a recovery as prime thus far, but also show modest year-on-year increases. Overall commercial sectors show much greater rental stability than during the global downturn of 2008/09,’ he added.