As we look ahead to what 2014 may bring for the commercial property market, the overall sentiment appears to be the most positive it has been for many years. From our point of view, increasing confidence and demand is certainly great news, but of course it means that getting the right property at the right price is all the more challenging, and therefore our role all the more important.
Amongst the many commentators out there, we have tried to summarise what the industry expects in 2014:
- The Investment Property Forum's Consensus Forecast, based on a survey of property investment market forecasts produced by fund managers, property and research consultancies and equity brokers, predicts an average total return figure of 9.3% for 2014, the highest since the 18.9% return seen in 2006. This figure encompasses optimism about not only increasing rental returns but also capital value growth.
- Ignis Asset Management, manager of a £1.1 billion UK Property fund, has gone even further, forecasting an 11.5% total return for the UK commercial property next year. Fund manager George Shaw stated "average property capital values remain about 30% below the previous peak recorded in 2007. Those sectors that continue to face fundamental challenges remain significantly behind, while markets with clear growth prospects have recouped a much greater proportion of those capital declines. We are confident memories of 2007 are recent enough to prevent the industry going there again."
- Evidently, much of the commentary and optimism is centred around London, but 2014 is likely to see more investment findings its way into the regions. Jones Lang LaSalle highlights the dearth of supply in London as a key reason for rising rents and prices, which according to Jon Neale, head of UK research at JLL "will force occupiers into new districts of London - and the regional cities especially Bristol and Manchester could also benefit. Lack of prime product - and falling returns - will push investors to move up the risk curve, to secondary stock and non-core locations."
- Deloitte Real Estate's predictions agree with this, stating that the UK commercial property market is set for strong performance in 2014 as a widening pool of investors become increasingly willing to move further up the risk curve. With the market picking up significant momentum towards the end of 2013, Deloitte expects to see capital values rise sharply over the next six months. Cushman & Wakefield's Bill Tyser agrees that after such a strong finish to 2013 “the market is now entering the era of a return to property fundamentals in light of economic recovery – principally that of property rental growth, with a controlled supply pipeline and increasing occupier sentiment, decision-making and demand.”
- Deloitte's prediction continues to overseas demand, which accounted for nearly half of all commercial real estate investment transactions during 2013. Thanks to investors from an even broader range of geographies, such as Taiwan, where insurance companies have recently been given permission to invest outside their domestic market, overseas demand will continue to bolster UK investment property.
- Looking at the finance market, the Property Week looks at the new breed of lenders, many from overseas, who are looking to fill the void left by the deleveraging of the major UK banks in recent years. In terms of finance, 2014 could even be the last year of lending at record low interest rates with speculation amongst many commentators that a Central Bank interest rate increase could happen in the not-too-distant corner, and this could help push a number of deals over the line this year.
Of course, we always lean towards the optimistic side of the fence at the beginning of each year, so our team certainly will not be taking anything for granted this year. But why not end on a positive note by returning to Deloitte's comprehensive 2014 prediction which includes the claim that 2014 will be the year that vacancy rates start to fall in certain locations and the revitalisation of the high street begins - now that's a thought...