UBS predicts a bounce-back in investor demand should a deal be reached with the EU, “but the recent change of Prime Minister and confrontational rhetoric which followed has made that outcome increasingly unlikely”.
UK office occupier demand has remained relatively stable with aggregate take-up in H1 dropping by 5.3% year on year, according to CBRE data, despite the impact of political uncertainty on corporate sentiment. Central London saw activity levels drop by 8.8% however occupiers continue to be active in seeking high quality office space which is in relatively short supply, according to UBS’ Real Estate Outlook report.
Zachary Gauge, European Real Estate Analyst, UBS-AM Real Estate and Private Markets, explains:
“Serviced offices occupier demand appears to have plateaued, at between 15-20% of total take-up and after several years of exceptional growth, this now accounts for 3.7% of total stock. This has placed pressure on traditional landlords who are responding by offering more plug-and-play office space, more services and greater flexibility than traditional leases. Encouragingly, the feared Brexit finance exodus has shown no signs of emerging – in fact the finance sector has seen net job creation of around 8,000 jobs since the EU referendum, whilst the tech sector has added a further 72,000 jobs over the same period.”
Activity in the main regional markets was mixed, UBS reports. Birmingham saw a significant increase in activity in 1H19 supported by three large deals to WeWork which totaled 230,000 sq ft as they continue their expansion outside of Central London. Leeds, Manchester and the South East also saw demand levels increase in 1H18, but again supported by some large deals to serviced office occupiers. However, Bristol, Edinburgh and Glasgow all saw activity decrease.
Sean Rymell, European Real Estate Analyst, UBS-AM Real Estate and Private Markets, explains:
“The last 12 months have been very tough for the retail sector as valuations have finally begun to catch-up with the weakening outlook. Retail rents fell by -3.8% over the 12 months to 2Q19, with more severe declines coming in the shopping center and retail warehouse segments. Shopping centers have been particularly afflicted by weak demand due to the oversupply in most key towns in the UK.
“The larger, more dominant out-of-town schemes have remained in demand but are requiring ever-increasing capex to do so. Within the retail warehouse segment, standalone units have fared better as they tend to cater to more traditional warehouse occupiers (such as DIY, home furniture etc.). They have not seen the high rental growth of many managed schemes, particularly fashion parks with open A1 consent. These schemes saw very high rental growth over the past decade and are now very much correcting as fast fashion continues to be disrupted by online.”
Occupier demand continues apace on the industrial sector, which saw annualised growth of 3.6% to Q2, according to data cited by UBS, who warned that achievable rents are increasingly coming under pressure from ‘affordability concerns’.
Increased vacancy in Central London over the past two years coincided with a decrease in vacancy in the wide South East area, according to a recent report by Gerald Eve. “This indicates occupiers are struggling with costs and willing to incur higher transportation expenses,” added Rymell. “In spite of this, take-up has been reasonably robust, particularly from high street and online retailers looking to shore-up their networks to accommodate the growing e-commerce demand.
UBS’ UK sector outlook will continue tomorrow.