Mixed outlook for main UK real estate sectors, new report suggests

Over 1.3 million square feet of new tower office space is confirmed for 2014 and retailers are in line for a Merry Christmas. But in the residential sector prices and transactions are set to slow across the country.
 
The report points out that in recent months it has become apparent that the supply response
originally expected to materialise in 2013 will now occur later. ‘The behavioural nature of developers, particularly in London, has been curtailed by the lack of speculative development finance and few schemes have got off the ground despite London’s supply gap,’ it says.
 
‘The schemes that will move the needle upwards in terms of supply will arrive but more likely in 2014 onwards than 2013. Therefore 2013 rental performance will be better than first thought with supply shortages coinciding with a stronger economy. This will be true in
London and the rest of the UK, although the demand side risk is greater in the latter markets due to public sector cut backs,’ it adds.
 
The outlook for 2011 is mixed. ‘Despite the supply side driver remaining convincing there is a sense that occupier activity will remain uncertain with no strong sector driving growth. The four year rental outcome 2011 to 2014 is, therefore, likely to remain the same but the path on which the market travels is subject to change,’ the report says.
 
It also indicates that occupier activity is more focussed on Grade A and bank driven releases of investment stock next year are more likely to be poorer quality grades. ‘Going forward we can expect rental and investment performance to become increasingly polarised. There is no shortage of investment demand for quality stock, but there is for poorer quality product and we forecast more volatility in pricing here,’ the report says.
 
Residential property price growth continues to weaken in the final months of 2010 with UK prices up 1.4% annually, although in light of public spending cuts, prices fell back 1.5% in the last quarter.
 
For the first time in nine months the supply of property for sale declined, the report says and a two tier market is apparent, splitting price performance in the London market from the rest of the UK.
 
‘We now think that the office supply response from developers originally expected in 2013 will be slower to materialise and so 2013 rental performance will be better than first anticipated as supply shortages are likely to coincide with a stronger economy. This will be true in London and the rest of the UK, although the demand side risk is greater in the latter markets due to public sector cut backs,’ said Stephanie McMahon, director in Jones Lang LaSalle’s UK Research team.