UK Quarterly MarketBeat December 2015 - Cushman & …/media/reports/uk/UK Quarterly Marketb… ·...

December 2015

QUARTERLYMARKETBEAT

UNITED KINGDOMA Cushman & Wakefield Research Publication

http://www.cushmanwakefield.com/

http://www.cushmanwakefield.co.uk/en-gb/research-and-insight/local-reports/

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A Cushman & Wakefield Research Publication

CONTENTS

UK Property Investment 3Performance at the prime end of the market is increasingly driven by rental growth, with yields at, or close to, previous peaks in many locations.

Economic Overview 5The UK economy has lost some momentum recently, mainly due to an underperforming export sector, but consumers and investment remain strong.

Property Finance 6 Improving risk appetites and the intense competition at the prime end of the market continues to boost liquidity and the availability of finance in regional markets.

Industrial 7Speculative development is improving, but supply constraints remain and occupiers and investors continue to target good quality stock in secondary markets.

Regional Offices 8Take-up volumes are being boosted by pre-let activity but while a number of core markets are set for a record year, some cities remain supply constrained with limited development pipelines..

London Offices 9Domestic buyers are becoming increasingly active and have accounted for half of all investment volumes in the last two quarters.

Retail 10Investment demand for prime retail assets is healthy and is becoming increasingly diverse, with a steady flow of new buyers emerging.

London Residential 12Stamp duty changes and other policy adjustments are having a notable impact on the prime central London sales market and purchasers are becoming more price sensitive.

Hospitality 13 The hotel investment market is on track for a record year, with volumes expected to exceed previous peaks in 2006.

Research Services 15

CAPITAL MARKETS CONTACTS

Jason WinfieldHead of Investment Agency, [email protected]

Patrick KnapmanUK Out of town [email protected]

Charlie BarkeUK shopping centres and in town [email protected]

James BeckhamCentral London: West [email protected]

James CrawfordCentral London: [email protected]

Chris LewisRegional [email protected]

Mark WebsterIndustrial & [email protected]

Adam McMillanBanking [email protected]

Edward DaubeneyDebt [email protected]

FORECAST MARKET RETURNS (ALL SECTORS)2014 2015 2016

Rental Growth pa 3.3% 4.4% 3.3%

Total Returns pa 17.8% 14.0% 9.6%

Source: Cushman & Wakefield

mailto:[email protected]









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UK PROPERTY INVESTMENTThe market has stabilised over recent months, with performance in many of the strongest segments increasingly driven by rental growth and less so by yield compression, with occupier sentiment positive and underpinned by healthy consumer and business confidence and the positive outlook for the economy. The low interest rate environment, combined with the relatively high and stable income yields of UK commercial property, is still proving attractive to new investors, although some buyers are more cautious in light of the strong run in values seen over the last few years, as well as the increases seen in global volatility.

According to the RICS UK Commercial Market Survey, occupational demand rose for the 12th consecutive quarter in Q3, with demand strengthening across all three main property sectors, although the improvements in retail are more modest in comparison to the office and industrial sectors. This is maintaining upward pressure on prime rents across all sectors, led by offices, which saw average rents increase 7.1% in the year to September, while retail rents rose 7.0% and industrial rents were up 3.8% during the same period.

While there have been some high profile deals failing to complete over the quarter due to a mix of global and deal specific factors, overall the sheer weight of capital targeting UK property continues to drive transaction volumes, which are at, or close, to record levels in some segments of the market. Eventhough volume growth may be slowing therefore, a strong end to the year is still expected, with a number of large schemes and portfolios currently on the market, as vendors look to capitalise on investors desire to capture growth and secure higher returns. Investment activity has been aided by the greater depth and liquidity in the financing market, particularly in the regions, with a broad range of bank and non-bank lenders targeting opportunities across prime, and more recently, secondary markets. Institutions are very active across all sectors, while there is also very strong appetite from UK property companies and overseas private equity, especially for prime and, more recently, secondary office and industrial stock that offer asset management potential.

Prime yields have been relatively stable in recent months and there are some signs that investors may be re-evaluating their views on pricing and risk, amid heightened global uncertainty and volatility. This is especially true in the retail sector, where average yields have been unchanged at 5.00% since June. The C&W All Property headline average prime yield hardened by 10bps to 4.73% in Q3, which is substantially below historic averages although still above pre-crisis levels by 25bp. Furthermore, the prime yield premium to 10 year government bonds is nearly double the long-term average (292bp versus 155bp over the last 20 years). Yield compression is therefore unlikely to be over and strong demand and high pricing is expected to persist into 2016.

PRIME PROPERTY PERFORMANCE ALL SECTORS




PRIME HEADLINE INVESTMENT YIELDS (SEP 2015)

PRIME RENT & YIELD MOVEMENTS TO SEP 2015Prime sample of 75 centres, (18 in Central London)

Rental Growth to Sep 20153 years (pa) One year One quarter

Shops 3.4% 7.0% 1.6%

Industrial 2.2% 3.8% 1.0%

Offices (all UK) 5.2% 7.1% 1.5%

Offices-Central London 7.2% 9.4% 2.3%

Average Prime YieldsSep 13 Sep 14 Sep 15

Shops 5.81% 5.64% 5.45%

Industrial 6.88% 6.18% 5.61%

Offices (all UK) 6.52% 5.86% 5.54%

Offices-Central London 4.95% 4.55% 4.20%

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INVESTMENT PERFORMANCE COMPARED

PRIME RENTAL GROWTH BY SECTOR

Source: IPD, Macrobond



NET INVESTMENT & CHANGE IN OUTSTANDING BANK LENDING TO PROPERTY

Sector TrendsUK funds and institutions and overseas private equity continue to show good appetite for prime regional retail assets. Prime shops in the South East remain a top target, although with yields at, or close, to previous peaks, investors are also considering well-configured shops in major regional hubs, which still offer strong potential for capital and rental growth. Furthermore, with risk appetites selectively improving and investors adopting a slightly more relaxed attitude to covenant strength, the best non-prime and secondary stock is attracting healthy interest. In the out of town segment, lot sizes in the £20-£50 mn range are particularly sought after, although these are in short supply. More private equity buyers and opportunity funds have emerged in recent months and are boosting demand for attractively priced assets in second tier and secondary locations.

Demand for prime shopping centres remains highly competitive, with a steady flow of new buyers emerging and competing hard for the available stock. However, some recent buyers are now fully invested and volumes were relatively subdued in the second and third quarters of 2015, not helped by the lack of prime investment supply, with increased sales of secondary centres driving recent activity. Nevertheless, there are several large prime schemes and portfolios currently on the market, which should ensure a strong finish to 2015. Buyers of secondary schemes - mainly private equity and asset managers - have become more wary on pricing recently, especially for the weaker secondary centres.

Offices are still the most popular asset class among investors and the strongest performing sector overall. Central London continues to lead the way, with investors moving up the risk curve to seek returns by looking outside the core markets for opportunities to add income and value. Short term income is also highly prized by many investors. The poor availability of good quality stock remains a key feature of the market however, and many core investors are struggling to deploy capital. Consequently, investors continue to look beyond London for higher yielding opportunities and many regional markets have seen an increase in institutional demand, while property companies and opportunity funds are also actively targeting stock with asset management/redevelopment potential. The office sector continues to see sustained downward pressure on yields across all sub-sectors.

Investment appetite for industrial assets, and in particular logistics assets, is as strong as ever, with investors attracted to the sector due to strong underlying fundamentals linked primarily to the e-commerce industry and stronger potential for rental growth than has historically been the case. The prime market has seen significant yield compression over the past 2 years, while yields in second-tier and the best secondary markets are also under sustained downward pressure, with local and overseas buyers increasingly targeting these markets to access greater opportunities and to achieve their required returns. UK institutions and property companies are still dominating activity, although there is rising competition from overseas investors.

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ECONOMIC OVERVIEWThe UK economy has lost some momentum recently, mainly due to weaker manufacturing output. Business confidence has been knocked by global economic uncertainty and financial market volatility and this was reflected in September’s services PMI survey, which dropped to 53.3 from 55.6 in August. This was the lowest level since April 2013, albeit the sector is still comfortably in growth. Retail sales are robust, however, with volumes up 6.5% year-on-year in September, the strongest performance for two years. GDP growth is estimated to have been 0.5% quarter-on-quarter in Q3, following growth of 0.7% in Q2.

The consumer sector remains very strong, with confidence at the highest level since the late 1990’s. Household budgets are being boosted by steady wage growth and renewed deflationary pressures on the back of further declines in oil prices and heavy discounting by retailers. Furthermore, the rate of employment reached a new record high in Q3. According to the ONS, the employment rate reached 73.7% in the third quarter, which is the highest level since comparable records began in 1971. Meanwhile, the unemployment rate fell to 5.3% in Q3 – down from 5.6% in Q2 – and the lowest level since April 2008. Retailers’ expectations are positive ahead of the crucial Christmas period and a strong finish to the year is anticipated.

The recent slowdown in the services sector is likely to be an indication of a moderation in the economy, following two years of above-trend GDP growth. This is, however, merely a return to more sustainable growth rates rather than a deterioration in economic fundamentals and the outlook for investment is strong. Profitability is close to previous peaks, companies’ cash holdings are near record levels and credit availability is much improved and many companies are still showing a healthy appetite for capital spending and hiring staff. Business investment is forecast to grow by 4.6% in 2015 and 5.1% in 2016.

The export sector is the weakest performing sector of the economy, with the sector being weighed down by the strength of the pound and weakening global demand. Stronger activity is forecast for 2016, as growth strengthens in the US and in the eurozone, although the contribution of the sector to UK GDP growth is still expected to be relatively modest in the medium term.

With the risks to global growth skewed to the downside and UK inflation having turned negative in September, there is uncertainty as to when the Bank of England will start to hike interest rates. Many commentators believe that the first hike will come in Q2 2016, although much will depend on the strength of domestic and global economic indicators over the coming months.

ECONOMIC INDICATORS

Source: ONS

Source: Consensus Forecasts

Source: Consensus Forecasts

ECONOMIC SUMMARY

Economic Indicators

2012 2013 2014E 2015F 2016F

GDP Growth 0.7 1.7 3.0 2.5 2.4

CPI Inflation 2.8 2.5 1.5 0.1 1.4

Consumer Spending 1.5 1.7 2.6 3.0 2.5

Corporate Investment 0.7 3.4 8.6 4.6 5.1

Manufacturing Output -1.3 -0.7 1.8 0.4 1.5

Interest rates – 3 month 0.5 0.5 0.5 0.6 1.0

Interest rates – 10 year 2.1 2.8 1.8 2.0 2.4

The outlook for business investment is still positive, despite wider global economic uncertainty

CHANGING FORECASTS FOR UK GDP GROWTH

2015

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PROPERTY FINANCEThe availability of financing for UK property is at post-crisis highs, with a steady flow of new lenders entering the market across all levels of the capital stack and targeting opportunities across a wide range of sectors and markets. With confidence high, lenders are showing strong appetite for new loan origination, while the number of lenders who are willing to underwrite large loans of over £100 million is also growing.

Competition in core locations is as strong as ever, with banks once again becoming active in the market. Non-bank lenders such as debt funds, insurers and private equity are also very active at the prime end of the market and, increasingly, in the secondary market, as they search for opportunities to secure higher yields and meet investor return requirements. The mezzanine finance market is highly competitive, with the risk-adjusted returns on offer – especially in the regions – proving attractive for a broad range of new and existing providers. There has also been a steady rise in the availability of equity that is prepared to invest in regional markets.

Swap rates are gradually rising, but the all in cost of senior debt is still near historic lows. This is mainly due to the high competition between lenders, which has kept average senior debt margins on core assets between 125bps to 200bps, compared with 190-250 bps at this point in 2014. Depending on asset quality and location, loan to value (LTV) ratios for senior debt are 60-70%, but a growing number of lenders are now willing to offer senior debt at the top end of this range. Activity in the junior debt market is healthy and the “whole loan” financing market has continued to strengthen, with many lenders interested in providing senior plus mezzanine financing in order to generate higher returns. This can increase the LTV to 80% and beyond.

Activity is beginning to stabilise in the European commercial real estate (CRE) loan and REO (real estate owned) portfolio sale markets, as many of the big players such as Lloyds Banking Group and RBS reach the end of their deleveraging programmes. Approximately €44.6 billion of transactions were completed year to date at the end of September, with a further €54.0 billion of live sales being tracked. The UK and Irish markets accounted for 60% of all closed transactions, with Permanent TSB, RBS and NAMA the main vendors.

The most active buyers in volumes terms continue to be US private equity firms such as Cerberus, Apollo, Lone Star and Oaktree Capital, who have been mainly focusing their attention on the “mega deals”. A recent example of this was the sale RBS’s Project Finn – a portfolio of non-performing Irish loans (NPLs) – which saw competitive bidding, before the three separate tranches were sold to Apollo/Deustche Bank, Cerberus and Sankaty Advisors.

The market is set for a strong finish to the year, with several more “mega-deals” expected to close, including NAMA’s €6.3 billion Project Arrow. Volumes are also expected to be boosted by increased activity in markets such as Spain, Italy and the Netherlands, which should offset some of the anticipated slowdown by vendors in northern Europe.

YIELDS AND INTEREST RATES

Source: ONS, Cushman & Wakefield

Competition between bank and non-bank lenders remains robust in core locations

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INDUSTRIAL & LOGISTICSThe industrial sector is seeing high demand across most UK occupational and investment markets. Despite a steady pick up in speculative development, the supply constraints in the big box and multi-let sectors show little signs of easing, which is forcing occupiers and investors to broaden their search criteria and target good quality stock in well-located second tier and secondary markets. This is maintaining upward pressure on rents across all regions, but most notably in the Thames Valley and South East.

Online retailers, major supermarket chains and third party logistics providers (3PLs) are all actively looking for modern, big box logisitics space to optimise their distribution networks, while there is also good appetite for mid-box space. Some parts of the manufacturing sector are generating healthy demand for large warehousing space, particularly in the Midlands region. Existing supply remains very tight, however, and take-up volumes were relatively modest at 5.4 million sq.ft in Q3. The number of build-to-suit deals has been diminishing in recent quarters and accounted for just 43% of total grade A take-up in Q3, compared with 90% in Q1 2015. Occupiers have been holding back from build-to-suit schemes in areas where preferable speculative development has picked up, especially in the South East, albeit many of these new units are being snapped up quickly for occupation.

The multi-let occupational market in the South East is robust, with demand coming from a broad range of industry sectors. The development pipeline is very limited however, and the availability of both grade A and good quality second hand space is diminishing in key locations around the M25. Incentives are being compressed and have limited capacity to tighten further, whilst there is upward pressure on headline rents. Hence net effective rents are under sustained pressure to increase.

The prime investment market continues to see strong demand from UK institutions and property companies, although some funds have been less competitive in recent months. Overseas investors are very active at the prime end of the market. Risk appetites are improving, with investors buoyed by the strength of the economy and occupier markets, attractive income returns and opportunities for asset management and this is driving demand for good quality secondary product and shorter income stock. Prime supply remains very tight, with only a limited number of larger deals available. This has triggered an increase in the number of portfolios of smaller assets being brought to the market, with landlords encouraged by the weight of demand and high prices being achieved. Prime distribution warehouse yields are 4.25%, while prime industrial estates are 4.50%. Secondary yields are currently at 6.25% and are under pressure to fall further for the best stock.

ANNUAL CHANGE IN LOGISTICS RENTS TO SEP 2015


PRIME LOGISTICS RENTS AS AT SEP 2015(10,000 sq.m unit) Rental Level PA Growth Short-

term Trend£/sq.ft/yr €/sq.m/yr 5 years 1 year

London – Heathrow 13.50 197 2.0 3.8

London – Croydon 11.00 161 5.3 10.0

Manchester 5.75 84 0.9 0.0

Birmingham 6.35 93 1.1 10.4

Bristol 7.75 113 0.7 0.0

Leeds 5.25 77 1.0 5.0

Newcastle 4.50 66 1.1 5.9

Cardiff 5.50 80 0.0 0.0

Edinburgh 7.25 110 -0.7 0.0

Glasgow 6.25 91 0.8 0.0

PRIME INDUSTRIAL/LOGISTICS YIELDS AS AT SEP 2015

Yield Level 10 Year Record Short-term TrendCurrent Last

QuarterHigh Low

London – Heathrow 4.25 4.50 7.00 4.25

London – Croydon 4.75 4.75 7.75 4.75

Manchester 5.25 5.25 7.75 5.25

Birmingham 5.25 5.25 8.00 5.00

Bristol 5.25 5.25 8.00 5.25

Leeds 5.50 5.50 8.25 5.25

Newcastle 6.00 6.00 8.50 5.75

Cardiff 5.75 5.75 8.50 5.50

Edinburgh 6.00 6.00 8.75 5.00

Glasgow 7.00 7.00 8.50 5.50



Prime investment supply remains very tight

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REGIONAL OFFICESBusiness activity is steadily improving across the UK, with demand for prime office space in key regional business hubs strengthening, driven primarily by the professional services sector. Recent business surveys have been weaker than expected, however, and suggest that the pace of expansion may be slowing, amid growing concerns over global economic uncertainty. Markit’s headline services PMI in September was at its lowest level since April 2013, while Deloitte’s third quarter CFO survey indicated that risk aversion is slowly rising among UK firms, with future activity likely to be driven more by cost consolidation rather than expansion.

Manchester is the strongest performing regional office market, with several large transactions recently completed, but a number of other cities, such as Bristol, are also in hot demand. In the South East, the Thames Valley is also performing well, with healthy demand from a broad range of sectors. Two recent key deals include SSE taking 186,000 sq.ft at 1 Forbury Place in Reading, while Maersk took 40,000 sq.ft at The Point in Maidenhead.

Take up volumes have been boosted by pre-let activity in a number of core markets, but overall take up is being constrained, to a certain extent, by the lack of prime stock. Development activity is picking up as a result, but it still some way below what is required to meet demand levels and cities such as Glasgow, Manchester and Birmingham have all seen reductions in availability rates. The situation is particularly acute in Birmingham, which has less than two years’ supply of grade A space remaining.

Most UK regions continue to see upward pressure on rents and incentives are starting to fall. The Thames Valley, South East and West Midlands have been the strongest performing regions in 2015, and prime headline rents in the top office locations have reached new highs, with further growth forecast.

The investment market has stabilised, with yields for prime regional tier 1 and tier 2 cities ending Q3 unchanged at 5.00% and 5.75%, while regional out of town office yields are static at 6.25%. Demand from both local and overseas investors has been at unprecedented levels in 2015, but there has been a moderation in demand recently, mainly at the prime end of the market. This is largely a reflection of the poor availability of grade A stock in key locations, with many core investors struggling to deploy capital and deciding to look elsewhere for higher yielding opportunities. This is benefitting second tier and secondary locations, which have seen an increase in institutional demand, while property companies and opportunity funds are also actively targeting stock with asset management/redevelopment potential in this segment of the market.

ANNUAL CHANGE IN OFFICE RENTS TO SEP 2015


PRIME OFFICE RENTS AS AT SEP 2015Rental Level PA Growth (%) Short-

term Trend£/sq.ft/yr €/sq.m/yr 5 year

compound1 year

Reading 33.50 489 3.3 0.0

Manchester 32.00 467 2.3 3.2

Birmingham 30.00 438 1.4 9.1

Bristol 29.50 431 1.4 7.3

Leeds 27.00 394 0.8 3.8

Newcastle 21.50 314 -0.5 7.5

Cardiff 22.50 329 1.4 2.3

Edinburgh 30.00 438 2.1 1.7

Glasgow 29.00 424 0.0 3.6

PRIME YIELDS AS AT SEP 2015Yield Level 10 Year Record Short-

term TrendCurrent Last Quarter High Low

Reading 5.25 5.25 7.75 5.00

Manchester 5.00 5.00 7.25 4.50

Birmingham 5.00 5.00 7.25 4.50

Bristol 5.00 5.00 7.50 4.50

Leeds 5.25 5.25 7.50 4.75

Newcastle 5.75 5.75 7.75 4.75

Cardiff 5.75 5.75 8.00 5.00

Edinburgh 5.50 5.50 7.25 4.50

Glasgow 5.50 5.50 7.25 4.50



Most UK regions are seeing upward pressure on prime rents

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LONDON OFFICESOccupational activity remains robust, with year to date take-up volumes reaching 9.7 million sq.ft in September, 3% ahead of the same period in 2014. Activity is being driven by strong demand from professional services firms, who accounted for 27% of take-up in Q3. There is also strong demand from the Banking and Media & Tech sectors.

Pre-lets are still an important driver of activity, particularly for larger transactions, with a total of 2.4 million sq.ft signed in the nine months to September, which equates to around 25% of all lettings in 2015. Pre-let volumes have been boosted by some key transactions in Q3, including Facebook taking 227,000 sq.ft at 1 Rathbone Place and Ashurst taking 275,000 sq.ft at the London Fruit & Wool Exchange.

By market, activity in the West End has moderated in recent quarters due to the lack of suitable product, with vacancy rates close to historic lows and many occupiers struggling to satisfy requirements. Prime rents were stable at £125.00 per sq.ft in Q3 but remain under pressure to rise across all submarkets. By comparison, the City, East London and Docklands markets are all seeing strong leasing activity, with Shoreditch and Canary Wharf, in particular, seeing an upturn in leasing volumes in Q3. The availability of space is expected to fall further over the coming months but an upturn in the volume of speculative deliveries is expected in 2016.

While some investors have pulled back, overall investment demand for Central London office assets is as strong as ever, with the market’s perceived safe haven status proving attractive to investors, amid renewed global economic uncertainty. Year to date investment volumes reached £15 billion in Q3, 10% ahead of the same period in 2014 and the strongest performance since 2007. Domestic buyers have been increasingly active and accounted for almost half the volumes recorded in the third quarter. Overseas funds are also very active. Larger assets are being targeted as investors look to deploy capital quickly, which reflects the robust demand for City offices, in particular. At the end of Q3, a total of 28 transactions in excess of £100 million had been completed in the City market, compared with a full year total of 30 transactions in 2014.

While the strong occupational market and weight of money continues to place yields under pressure, there was limited movement from their current historical low level in Q3. Prime City yields stayed at 4.00%, while prime West End yields remained at 3.25%. Despite this low level, yields are still attractive relative to 10 year bond yields, which stood at 1.77% at the end of September, and further compression is expected over the coming months.

LONDON OFFICES PERFORMANCE


PRIME LONDON OFFICE RENTS AS AT SEP 2015Rental Level PA Growth Short-

term Trend£/sq.ft/yr €/sq.m/yr 5 year 1 year

Mayfair 125.00 1,826 6.8 8.7

Victoria 80.00 1,169 7.8 6.7

City Core 66.50 971 3.9 10.8

City Outer Core 53.50 781 4.7 9.2

Midtown 65.00 949 6.5 8.3

Paddington 62.50 913 4.6 8.7

PRIME LONDON OFFICE YIELDS AS AT SEP 2015Yield Level 10 Year Record Short-


Mayfair 3.25 3.25 6.00 3.25

Victoria 4.00 4.00 6.50 4.00

City Core 4.00 4.00 6.50 4.00

City Outer Core 4.50 4.50 9.00 4.50

Midtown 4.25 4.25 7.00 4.25

Paddington 4.50 4.75 7.00 4.50

OFFICE SUPPLY AND DEMANDSupply (mn sq.ft) Take-up (mn sq.ft)

Mar 15 Jun 15 Sept 15 Q1 2015 Q2 2015 Q3 2015

City & Docklands 10.76 10.02 9.39 2.16 2.08 2.04

West End 2.97 2.66 2.48 0.75 1.02 0.95

Thames Valley 3.19 3.20 3.31 0.32 0.24 0.35

Edinburgh 1.78 1.71 1.68 0.18 0.18 0.20

Glasgow 4.19 4.31 4.23 0.27 0.18 0.17




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RETAIL

High Street – Central LondonThe robust performance of the Central London retail market shows little signs of easing, with unprecedented levels of demand from international retailers for space on the prime retail thoroughfares. Bond Street remains the top target for leading international luxury brands, but other locations in Mayfair are also highly sought after. Oxford Street and Regent Street are also in high demand, particularly from European retailers looking to open flagship stores. Rents are at record highs and, with supply increasingly limited, further rental growth is anticipated in both core and off-core locations, with some occupiers still willing to pay significant premiums to secure the best space. Tight supply will remain a key feature of the market in short term, but new development around major transport projects, such as Crossrail, is expected to boost supply levels over the medium term.

Despite the lack of opportunities and low yields on offer, the investment market continues to attract exceptional demand from a broad range of global investors. Prime yields are at 2.25%, the lowest level on record, although investors appear willing to bid yields lower across most submarkets, confident in the wealth preservation qualities of these assets, the prospects for further rental growth at rent review and lower capital expenditure, when compared with other sectors.

High Street – RegionalRegional high street occupational markets continue to steadily improve, with retailers growing in confidence. The top 25 locations are seeing strong demand from new entrants and existing retailers, such as Lulu Lemon, Smiggle, Holland & Barrett and Card Factory. The availability of suitable space – especially larger formats – is dwindling and some retailers are now more willing to consider space in the best second tier locations.

The recovery in secondary markets has yet to build any momentum of note however, with demand moderate and driven mainly by discounters. Prime rents in the strongest towns remain under upward pressure, although rental growth may be marginal, with occupiers wary of the anticipated rise in interest rates in 2016.

UK funds and institutions are dominating investment demand for prime high street assets, although there has also been better interest from overseas investors recently. Much of the demand is focused on market towns in the South East and in key regional cities, but with yields at, or close, to previous peaks, investors are also targeting well-let units in some second tier locations. Demand for secondary stock is still highly selective, with some opportunistic investors targeting properties that offer asset management angles. Prime high street yields are under pressure to fall from the current 4.25%, while secondary yields are estimated to be 7.50%+, with each asset typically considered on a case by case basis.

ANNUAL CHANGE IN SHOP RENTS TO SEP 2015


PRIME RETAIL RENTS AS AT SEP 2015Note: Zoning bases differs between cities

Rental Level PA Growth Short-term TrendZone A

£/sq.ft/yr€/sq.m/yr 5 year 1 year

London-West End 1,400 12,270 8.1 12.0

London-City 260 1,937 3.4 4.0

London-Croydon 170 1,266 -4.6 0.0

Manchester 265 1,974 1.2 6.0

Birmingham 225 1,676 -2.1 0.0

Bristol 150 1,117 -1.9 0.0

Leeds 240 1,788 -0.8 9.1

Newcastle 225 1,676 -2.9 0.0

Cardiff 220 1,639 -0.4 2.3

Edinburgh 200 2,009 1.0 5.3

Glasgow 260 2,611 0.8 2.0

PRIME RETAIL YIELDS AS AT SEP 2015Yield Level 10 Year Record Short-


London-West End 2.25 2.25 4.25 2.25

London-City 4.50 4.50 6.50 4.50

London-Croydon 6.50 6.50 6.75 4.25

Manchester 5.00 5.25 6.75 4.25

Birmingham 5.25 5.50 6.75 4.25

Bristol 5.50 5.75 6.75 4.50

Leeds 4.75 5.00 6.25 4.25

Newcastle 5.25 5.25 6.25 4.00

Cardiff 5.00 5.25 6.50 4.00

Edinburgh 5.00 5.00 7.00 4.00

Glasgow 4.50 4.75 6.75 4.00

Source: Cushman & Wakefield Note: €/sq.m/year figures are on an equivalent non-Zone A basis


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Shopping CentresOccupier demand is mainly focused on prime shopping centres in the South East and in other prime regional locations, but the biggest challenge facing many expanding retailers is the lack of large, modern, well-configured space in these locations. The development pipeline is still weak, and while developers are becoming more confident, the short term focus continues to be on extensions and improvements to existing schemes. Average prime shopping centre rents have remained relatively unchanged in 2015, but some secondary schemes are still struggling with poor demand, rising vacancy and falling rents.

Investment demand for prime UK shopping centres is healthy and becoming increasingly diverse, with a steady flow of new buyers emerging and competing hard for the available stock. Demand for secondary stock, which is mainly driven by private equity and asset managers, has waned recently, with some buyers now fully invested and others increasingly wary on pricing, especially for the weaker secondary centres. Volumes have been relatively weak in the second and third quarters, with £594 mn recorded in Q3, which was only 44% of the volumes recorded in the same period in 2014. Nevertheless, a strong finish to the year is anticipated, with a number of large schemes and portfolios currently on the market, including a £500 mn, 50% share in Intu’s Merry Hill in Dudley, the £310 mn Grand Central in Birmingham and the £300 mn Festival Place in Basingstoke. Yields for prime stock are stable at 4.50%, while yields for the best secondary stock are 6.50% but may soften over the coming quarters, amid more subdued demand.

Out of Town RetailOccupier demand for bulky goods space is strong in prime locations, with retailers such as Wren Living, Tapi, DFS and Dunelm looking to expand their national store portfolios. Demand for prime open A1/fashion space is also steadily improving, with Next and Debenhams very active and targeting larger format stores.

CHANGE IN RETAIL YIELDS AS AT SEP 2015

Decathlon is another retailer with ambitious expansion plans, but it has struggled to expand its larger 30,000 sq.ft format and is now focusing on smaller, more traditional units of 10,000 sq.ft. Demand in the foodstore sector remains focused on smaller format stores of 15-20,000 sq.ft, with Aldi, Lidl and M&S looking to roll out stores in this size range. Prime rents are under pressure to rise for the right formats in the best locations, while secondary rents are static.

Investment activity has been steady in recent quarters, with a strong focus on prime stock in key locations. Lot sizes in the £20-£50 million range are particularly sought after, although the availability of good quality prime assets is limited and this, coupled with the positive occupational trends, is boosting investor appetite for attractively priced assets in second tier and secondary locations. UK institutions and retail funds are very active, but there is also good interest from non-domestic private equity buyers and opportunity funds. Prime Open A1 yields are stable at 4.50%, while prime bulky goods yields are stable at 5.50% and little change is expected before year end.


PRIME RETAIL WAREHOUSE RENTS AS AT SEP 2015Bulky Goods Open Consent

£/sq.ft/yr €/sq.m/yr £/sq.ft/yr €/sq.m/yr

London (Croydon) 40.00 584 37.50 548

Manchester 25.00 365 35.00 511

Birmingham 27.50 402 42.50 621

Bristol 22.00 321 30.00 438

Leeds 32.50 475 37.50 548

Newcastle 20.00 292 33.00 482

Cardiff 17.00 248 22.50 329

Edinburgh 27.50 402 35.00 511

Glasgow 20.00 292 33.50 489


Note: Rents are based on our opinions of open market letting for a hypothetical 7,500 sq.ft unit at prime location.

PRIME YIELDS AS AT SEP 2015Yield Level 10 Year Record Short-


Shopping Centres 4.50 4.50 7.00 4.50

RWP Bulky Goods 5.50 5.50 9.25 4.50

RWP Open Consent 4.50 4.50 8.00 4.00

RWP Shopping Park 4.25 4.25 7.00 3.75

Solus DIY RW 6.00 6.00 8.75 4.50

Foodstores 4.75 4.75 6.00 3.75


12


LONDON RESIDENTIALNational house price growth rose gradually to an annual average of 3.8% in Q3 2015, according to the Nationwide House Price Index. The annual growth rate across Greater London strengthened from 7.3% in Q2 to 10.3% in Q3, the highest price growth nationally.

Stamp Duty Land Tax (SDLT) changes from December 2014 are beginning to more clearly affect the prime central London (PCL) sales market. Other policy changes such as the restrictions on non-domicile status, inheritance tax for overseas owners, reduced tax relief on rental investments and annual taxes on properties owned by companies and trusts are also having an impact, particularly for international purchasers. Consequently, purchasers are becoming increasingly price sensitive, with a strong focus on “best-in-class” properties, with building amenities such as concierge services and leisure facilities.

Outside of central London, demand is robust, with equity rich buyers targeting attractively priced opportunities in Greater London and the Home Counties. Much of this demand is driven by professionals moving out of London, seeking larger homes with ample gardens in areas with reputable schools and good transport links to the capital. Large trophy houses on the private estates are particularly popular, with growing activity from international purchasers, who are attracted to large trophy houses, good access to London and high security. Supply remains limited in many desirable regional locations however, which is expected to underpin steady price growth over the medium term.

Residential development activity in London is high and rising. According to Molior-London, the number of new homes under construction at the end of September was at a record 57,500, up 32% on 12 months previously. Total construction starts in 2015 were 25,971 units (294 schemes), 15% higher than the full year total for 2014. Outer London boroughs have accounted for 40% of all construction starts in 2015 (10,303 units in 138 schemes), up 26% on 2014, as developers continue to recognise lower cost opportunities outside of central London. The east London Boroughs of Tower Hamlets, Newham and Greenwich saw the greatest number of construction starts, with a total of 35 schemes across the 3 boroughs in the nine months to September.

October’s Housing and Planning Bill saw Permitted Development Rights (PDRs) made permanent, which allow developers to convert vacant offices to residential accommodation without planning consent. Developers may also now demolish existing buildings, replacing them with new structures of the same external dimensions, subject to Prior Approval. Completed units in these schemes are popular, due to their highly accessible nature and relative affordability, whilst yields have proved attractive to investors.

UK ANNUAL HOUSE PRICE INFLATION (ALL DWELLINGS)

UK ANNUAL HOUSE PRICE INFLATION (BY TYPE OF BUYER)

Source: ONS

Source: ONS

Prime central London buyers are becoming more price sensitive, with a strong focus on “best in class” properties

13

HOSPITALITYThe UK hotel sector is in good health, with the Rugby World Cup providing a significant boost to the market in September and October. Revenue per available room (RevPAR) is ahead of pre-crisis RevPAR levels in absolute terms, while average room rates (ARR) have been steadily rising across most major cities. This, coupled with the drop in oil prices and very low inflation, has underpinned growth in gross operating profit per available room (GOPPAR) in 2015. Secondary locations have also been slowly recovering, although performance can vary considerably, depending on differences in local economic drivers and the demand/supply balance.

There has been some signs of maturity in the market in recent months, however. Occupancy rates are close to previous peaks and further growth is expected to be limited across many key regional cities. Supply has increased by an average of 8% in the top 12 UK cities in the last two years and increased competition from new supply will place additional pressure on future performance. Furthermore, the possibility of an increase in interest rates in 2016 (albeit that looks less certain than previously) is likely to weigh on disposable incomes, which may impact on demand for hotels, while the strength of the pound may lead to some decline in overseas visitors.

The supply pipeline is strong, particularly in the budget sector, where operators such as Travelodge and Premier Inn are continuing with aggressive expansion strategies. This continues to impact on mid-market hoteliers and, consequently, the proportion of three star hotels in development is falling. There is strong competition for new sites across the UK and this is driving up land values, with some hotel groups increasingly looking at opportunities to extend or enhance their existing properties. The availability of development finance is slowly improving, with some investors now willing to consider joint ventures with developers and/or forward funding deals in a bid to deploy capital and secure higher returns.

The hotel investment market is on track for a record year, with volumes expected to exceed the £8.3 billion peak recorded in 2006. Volumes have been boosted by the completion of several large portfolio deals in 2015, with US private equity firms very active. Asian and Middle Eastern investors have also been increasingly acquisitive in recent quarters. There is high competition for assets at the prime end of the market, while there has also been better activity in secondary markets, with investors confident in the longer term prospects for the hotel sector. This is exerting downward pressure on yields across all segments of the hotel market.

UK HOTEL PERFORMANCE Q3 2015% Change Y-O-Y % Change

Q-O-Q

Market RevPar ARR Occupancy Supply

London 6% 6% 0% 2%

Birmingham 12% 8% 4% 1%

Manchester 6% 4% 3% 6%

Leeds 8% 5% 3% 0%

Newcastle 2% 6% -4% 11%

Edinburgh 3% 4% 0% 2%

Aberdeen -22% -14% -9% 9%

Glasgow -10% -10% 0% 1%

Belfast 11% 9% 3% 0%

Liverpool -3% -4% 1% 4%

Cardiff 17% 13% 3% 0%

Bath 4% 3% 1% 5%

Source: AM:PM Notes: RevPar: Revenue per Available Room ARR: Average Room Rate

14


GEOGRAPHICAL KEY FOR ALL GRAPHICS

EA = East Anglia NW = North West SE (ex-L) = South East (ex London) WM = West Midlands SL = Suburban LondonEM = East Midlands S = Scotland SW = South West Y&H = Yorkshire & Humberside C of L = City of LondonN = North SE = South East W = Wales WE of L = West End of London GB = Great Britain

QUARTERLY MARKETBEAT September 2015RENTAL GROWTH

EA EM N NW S SE SW W WM YH GB

Retail

Base 5.2% 4.5% 4.3% 4.7% 4.6% 6.0% 4.5% 3.8% 4.4% 5.4% 5.6%

10 Years -1.7% -3.4% -2.7% -2.4% -0.3% 3.1% -2.5% -4.5% -3.4% -1.4% 1.1%

5 Years -1.7% -1.2% -0.6% 0.3% -0.2% 4.6% -2.3% -3.7% -2.7% -0.1% 2.7%

3 Years -0.6% -1.7% -0.3% 1.5% 0.3% 5.4% -1.5% -5.1% -4.3% 1.1% 3.4%

1 Year 1.9% 0.0% 4.1% 9.7% 2.5% 8.9% -0.1% -0.2% 0.0% 2.0% 7.0%

6 Mths 1.9% 0.0% 3.0% 8.5% 0.0% 5.3% 2.8% -0.2% 0.0% 1.4% 4.4%

1 Qtr 0.0% 0.0% 3.0% 7.4% -0.8% 1.5% 2.8% 1.5% 0.0% 0.0% 1.6%

Office

Base 5.6% 5.5% 5.8% 5.7% 5.7% 5.5% 5.4% 5.1% 5.9% 4.8% 5.5%

10 Years 2.5% 0.4% 1.0% 1.9% 2.6% 4.3% 0.7% 2.3% 0.2% 1.3% 3.5%

5 Years 1.4% -0.8% -0.4% 0.7% 1.9% 6.5% 0.1% 1.5% 1.2% 0.9% 4.9%

3 Years 2.3% 0.3% 0.7% 0.0% 1.1% 6.6% 0.6% 1.1% 3.0% 2.8% 5.2%

1 Year 0.0% 1.1% 7.5% 2.0% -0.6% 8.6% 2.5% 1.4% 12.1% 2.4% 7.1%

6 Mths 0.0% 0.0% 2.4% 1.0% -1.1% 4.1% 1.7% 1.4% 6.6% 0.8% 3.4%

1 Qtr 0.0% 0.0% 0.0% 0.5% 0.0% 1.9% 0.0% 0.0% 0.8% 0.0% 1.5%

Industrial

Base 4.4% 4.3% 4.1% 4.2% 4.6% 4.8% 4.6% 3.9% 5.0% 4.2% 4.3%

10 Years 2.2% 0.6% -0.3% 0.7% 3.2% 1.4% 0.6% -0.6% 0.9% 0.4% 1.2%

5 Years 2.5% 0.9% 0.6% 0.4% 0.9% 2.5% 0.2% -3.6% 0.8% 0.0% 1.3%

3 Years 4.0% 0.9% 0.9% 0.9% 0.0% 3.7% 0.0% -4.4% 3.2% 0.5% 2.2%

1 Year 5.6% 1.5% 3.1% 1.2% 0.0% 6.2% 0.0% 0.0% 4.7% 1.7% 3.8%

6 Mths 1.3% 0.0% 3.1% 0.0% 0.0% 2.7% 0.0% 0.0% 2.5% 0.0% 1.6%

1 Qtr 1.3% 0.0% 0.0% 0.0% 0.0% 1.8% 0.0% 0.0% 0.9% 0.0% 1.0%

AVERAGE PRIME YIELDSRetail

Sep-14 5.67% 6.17% 6.44% 6.50% 5.58% 5.02% 6.00% 6.83% 6.35% 5.94% 5.64%

Dec-14 5.67% 6.17% 6.44% 6.42% 5.58% 4.96% 5.95% 6.83% 6.35% 5.94% 5.60%

Mar-15 5.67% 6.17% 6.44% 6.38% 5.42% 4.90% 5.95% 6.83% 6.35% 5.94% 5.56%

Jun-15 5.67% 6.17% 6.44% 6.38% 5.42% 4.76% 5.90% 6.83% 6.35% 5.88% 5.49%

Sep-15 5.58% 6.17% 6.44% 6.33% 5.33% 4.74% 5.85% 6.75% 6.30% 5.75% 5.45%

Office

Sep-14 6.50% 6.83% 6.00% 5.75% 5.83% 5.61% 6.63% 6.00% 6.25% 6.25% 5.86%

Dec-14 6.50% 6.83% 6.00% 5.75% 5.67% 5.59% 6.63% 6.00% 6.25% 6.25% 5.84%

Mar-15 6.42% 6.75% 5.75% 5.50% 5.67% 5.45% 6.38% 5.75% 6.08% 6.08% 5.70%

Jun-15 6.17% 6.33% 5.75% 5.50% 5.67% 5.36% 6.06% 5.75% 5.83% 5.92% 5.57%

Sep-15 6.17% 6.33% 5.75% 5.50% 5.75% 5.31% 6.06% 5.75% 5.83% 5.92% 5.54%

Industrial

Sep-14 6.00% 5.75% 6.94% 6.21% 7.42% 5.68% 6.25% 6.92% 6.00% 6.38% 6.18%

Dec-14 5.67% 5.50% 6.69% 5.96% 7.08% 5.42% 5.85% 6.58% 5.75% 6.13% 5.90%

Mar-15 5.67% 5.50% 6.69% 5.96% 6.42% 5.42% 5.85% 6.58% 5.75% 6.13% 5.86%

Jun-15 5.42% 5.25% 6.44% 5.71% 6.42% 5.17% 5.60% 6.33% 5.50% 5.88% 5.62%

Sep-15 5.42% 5.25% 6.44% 5.71% 6.42% 5.15% 5.60% 6.33% 5.45% 5.88% 5.61%

RESEARCH SERVICESCushman & Wakefield research staff are located throughout the world with the EMEA service co-ordinated in London, the Americas in New York and Asia in Shanghai.

Research provides a strategic advisory and supporting role to clients and other departments within the firm with extensive and continuously updated information systems covering property, economic, corporate and social trends.

Consultancy projects are undertaken on a local and international basis. We provide in-depth advice and analysis, producing detailed market appraisals on current and future trends for developers, investors and occupiers. We also advise on location and investment strategies and portfolio performance. Typical projects include a mix of the following:

• Location analysis, ranking and targeting for occupation or investment

• Future development activity and existing supply/competition

• Demand analysis by retail/industry sector

• Rental analysis, forecasts & investment & portfolio strategy

• Floorspace audits, tenant-mix assessment & catchment/ expenditure analysis

• Retailer, occupier and consumer surveys

• Pedestrian flow analysis & local employment studies

For industry-leading intelligence to support your real estate and business decisions, go to Cushman & Wakefield’s research and insight pages at cushmanwakefield.co.uk.

http://www.cushmanwakefield.co.uk/en-gb/research-and-insight/local-reports/

For more information about the report or Cushman & Wakefield, please contact:

David Hutchings Head of EMEA Investment Strategy +44 (0)20 7152 5029 [email protected]

The successful merger of Cushman & Wakefield and DTZ closed September 1, 2015. The firm now operates under the iconic Cushman & Wakefield brand and has a new visual identity and logo that position the firm for the future and reflect its trusted global legacy and wider history. The new Cushman & Wakefield is led by Chairman & Chief Executive Officer Brett White and Global President Tod Lickerman. The company is majority owned by an investor group led by TPG, PAG, and OTPP.

About Cushman & Wakefield

Cushman & Wakefield is a leading global real estate services firm that helps clients transform the way people work, shop, and live. The firm’s 43,000 employees in more than 60 countries provide deep local and global insights that create significant value for occupiers and investors around the world. Cushman & Wakefield is among the largest commercial real estate services firms with revenue of $5 billion across core services of agency leasing, asset services, capital markets, facility services (C&W Services), global occupier services, investment & asset management (DTZ Investors), project & development services, tenant representation, and valuation & advisory. To learn more, visit www.cushmanwakefield.com or follow @CushWake on Twitter.

© 2015 Cushman & Wakefield, Inc. All rights reserved.

Note: All Cushman & Wakefield data referred to in this report is sourced from legacy Cushman & Wakefield and uses the definitions and methodologies of the legacy C&W research team.

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