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UK real estate and Our property news
Yields shift inwards
- Prime yields in February 2017 sharpened slightly reaching an average of 4.79%. The sixth month in a row where pricing improved. The only shift was in the City office market, where falling supply and continued international investor demand saw yields move to 4.00%. In the City, Savills Research estimates that there is currently £2.7bn worth of stock currently under offer.
- Investment volumes reported by Nationwide is expected to beat the long term quarterly average of £9.8bn (see investment intentions graph from David’s Brexit presentation).
- A current barrier to liquidity in the market is the lack of investment stock being considered for sale.
- Most sectors are reporting steady investment volumes.
- Regional High Street Retail is showing upwards pressure on yields, due to the shift to online retailing.
- Downward pressure on yields is in the South East and Regional office market. Assisted by overseas investors increasing their exposure to the regional market.
- There is little speculative development in the UK office or logistics sector, with continued occupational demand, pre-let funding’s or refurbishment opportunities will push investment volumes forward. According to RealFor, total returns between 2017 through to 2021 will reach up to 8.4% per annum for some regional office markets, outpacing what is forecast for many Central London sub-markets.
- Commercial property investors continue to be taxed in the same way as domestic buyers making the UK more attractive than some markets with extra non-dom taxes.
- Sterling’s depreciation has benefitted overseas investors.
- The weaker pound is also attracting additional tourists, helping to underpin retail and restaurant rents and values in Mayfair, Soho and Covent Garden.
Investment into commercial property in London’s West End reached a new record of £1.93bn in the first quarter of the year – despite market perceptions and concerns over the UK’s exit from the EU (source: Cushman & Wakefield). The figure surpasses the West End’s previous record volume of £1.80bn, set in 2013, and exceeds the 5-year first quarter average by 22%.
The figure was swelled by several large deals, including the Ampersand building in Soho, which sold for £260m, reflecting £2,910 per sq ft and a net initial yield of 2.93%.
In the West End, current stock levels are low, and the wealth of capital targeting is helping to maintain prime yield levels across most sub-markets.
The City of London also enjoyed a strong first quarter, with total transaction volumes reaching £2.25bn, a 9% increase on the £2.07bn recorded a year ago.
Office Take Up
In the West-End 2017 take-up reached levels of 764,351 sq ft, 31% above this point in 2016 and 30% above the 10 year average. In the City of London take-up for February was 364,419 sq ft, bringing total take-up for 2017 to 666,958 sq ft, which is 18% down on this point last year. Total City & Central London demand is 9.5m sq ft, which is up by 9% on the long-term average.
The effects on the office sector with the threat of relocation of jobs
- Forecasts from Oxford Economics for office based employment demonstrate that in Central London, total employment is set to rise from 2.5m currently to 2.8m people by 2025.
- The proportion of employees in the tech sector is expected to outweigh the financial sector within the next 5 years.
- We are currently seeing no significant effect on the office sector, and the above two points provide the security that this sector is unlikely to be heavily affected.
- Areas of concern are Canary Wharf and the City of London, where there is a high concentration of financial services companies.
Changes in the movement of goods and labour on the industrial sector
- UK retailers may aim to store more inventory in the UK if significant barriers are placed at the borders. Therefore a by-product of Brexit may be a further surge in the amount of warehouse space required in the UK.
- Article 50 was triggered on 29th March 2017. Further dates for the diary include the EU Summit on April 29th, the French Presidential Election on May 7th.
Residential UK and London
- The prospect of weaker economic growth is likely to remove any significant upward pressure on house prices over 2017 and 2018.
- A pickup in economic growth and confidence, as the future political and economic landscape becomes clearer, is expected to underpin a return in house price growth from 2019.
- Private buy to let investors face a combination of higher stamp duty costs, less income tax relief and greater mortgage regulation, causing a continued imbalance between supply and demand in the private rented sector, pushing up rents.
- Taxation is also a key driver in the prime housing markets, where stamp duty rates are highest. Sterling is expected to remain weak, offering instant savings to non-domestic purchasers, however overseas investors face higher exposure to capital taxes.
- 13% 5 year capital growth forecast for UK residential
- 19% 5 year rental growth forecast for UK residential
- Significant areas of development such as Nine Elms in Battersea pose risks for investors.
Our property news
- Hermes acquired 51 Bethnal Green Road for £2,350,000 at a net initial yield (NIY) of 4.36%, let to Brewdog Retail Ltd and next to the fashionable Redchurch Street and Brick Lane in Shoreditch.
- 74 Wardour Street redevelopment completed in November 2016. The three, new one-bed flats let immediately at rents averaging £550 per week.
- Rent review at 428 Strand with a rent increase from £135,000 pa to £187,000 pa.
- Rent review at 65a Long Acre with a rent increase from £110,000 pa to £130,000 pa
- Sparta was launched with two properties, following the strategy of improving transport links, gentrification and large-scale residential development:
- 50 The Broadway, Ealing acquired for £1,100,000, located next to a new Crossrail station with additional development opportunities.
- 29/31 Parkway, Camden, acquired for £2,300,000. The property has development potential, a low price per square foot and is situated in an improving area.
- Hermes acquired 23 Meard Street in Soho for £4,000,000. The property is adjacent to Hermes’ existing estate holdings at 74 and 72 Wardour Street. The property is currently vacant and is in planning to convert the ground and basement into retail use with offices above.
- Cratos acquired 25-27 Farringdon Road for £2,800,000, to build on our focus of Crossrail and Farringdon as a major hub. The property is located 25 meters from a new Crossrail entrance and is let to Boots.
- 57 St John Street in Farringdon is in planning to be developed into four flats with a public house on the ground and basement floor. Development will begin in January 2018 if planning is secured.
- Consulco is currently managing the development of 105 Charterhouse Street in Farringdon, converting the public house upper floors into 3 flats, including excavation works to extend the basement for the ground/ basement retail unit. The development is expected to complete in November 2017, Consulco are expecting a total rent of £250,000 pa. The rent passing totalled £47,000 pa when Ares purchased the property in 2013.
- 75 Turnmill Street rent review with a rent increase from £78,100 to £110,000 pa.
Disclaimer: This article contains general information only, and none of Consulco Limited, its member firms, or their related entities (collectively, the “Consulco Network”) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Consulco Network shall be responsible for any loss whatsoever sustained by any person who relies on this communication.