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UK commercial property in three-tier recovery

The June Knight Frank UK Market Outlook report shows a clear divide between three tiers of commercial property. Understanding the reasons for this divide is vital for commercial property landlords and investors looking for reliable returns. Investment volume from January to May was £23.6 billion – a 33% increase on 2014 figures – and capital growth rose 0.8% month-on-month. However, the report shows that offices and retail are “living in different worlds”, while industrial properties are achieving steady growth.Dukes-ThreeTierRecovery

Offices on form

Based on Investment Property Databank figures, UK offices registered capital growth of 1.5% in May and 12-month rental growth of 7.8%, rising quickly towards 2007’s peak of 8.6%.

The development pipeline has been slow to respond to increasing demand, and with vacancy rates in London at historic lows, Knight Frank's Chief Economist James Roberts believes that the demand for space in the capital will push rental growth past its previous peak before the end of the year.

Limited space is also forcing businesses to consider moving certain functions elsewhere, so we’re likely to see both rental and capital growth boosted in other UK cities too.

Industrial readjusted

Here capital growth was 0.8% and rental growth 0.4%, with both on course for a slow and steady increase.

Though lacking the momentum of the office rental market, Roberts views this as a healthy “downwards gear change”. The boost from the e-commerce market now seems to be priced in, and with e-commerce expanding less aggressively in the retail market, prices are looking stable.

Retail underperforming

At 0.2%, retail capital growth was by far the lowest, and rental value growth has slipped back to zero after briefly rising in April.

Retail sales have looked robust for several months, and new occupier groups such as cafes and click-and-collect services have emerged to stem rising vacancy rates, leading Roberts to conclude that the underperformance has more to do with leasing fundamentals.

Local Data Company stats show vacancy rates are stuck around 13%, stifling potential for rental growth and leaving capital growth vulnerable to new developments close by. This means the sector will remain fragile until a new occupier group can re-energize it.

If your investments are locked into commercial property and you need help recouping commercial rent arrears in a timely and sensitive manner, contact a Dukes Bailiffs advisor today.

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