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March 2016

QUARTERLY
MARKETBEAT
UNITED KINGDOM
A Cushman & Wakefield Research Publication

A Cushman & Wakefield Research Publication

CONTENTS
UK Property Investment

Investment volumes reached record levels in 2015 and while


yields hit new lows in some locations, investors have more
recently been re-evaluating their views on pricing and risk.

Economic Overview

Consumers and business investment expected to remain the


main drivers of growth in 2016, helped by low energy prices,
negligible inflation and exceptionally loose monetary policy.

Property Finance

The senior debt and mezzanine finance markets are very


competitive, with a broad range of lenders showing a
healthy appetite for new loan origination.

Industrial

FORECAST MARKET RETURNS (ALLSECTORS)


2015

2016

2017

Rental Growth pa

4.2%

3.9%

2.4%

Total Returns pa

13.8%

10.1%

7.1%

Source: Cushman & Wakefield

The big box market is still recording rental growth in key


regional locations, while rising demand and a lack of
development is maintaining upward pressure on headline
rents in the multi-let sector.

Regional Offices

Speculative development is forecast to increase significantly


over the next three years, but a large proportion of new
space due for completion in 2016 has already been taken
due to high demand.

London Offices

The strongest rental growth in 2015 was recorded in


non-core submarkets, with the rental differential between
traditional core submarkets and emerging ones narrowing
fast.

Retail

10

The regional high street investment market performed well


in 2015, with stronger demand being noted for all lot sizes,
from both UK and overseas investors.

London Residential

12

Outer London boroughs are now seeing the strongest


growth in pricing and activity, with Prime Central London
(PCL) continuing to see a decline in the number of
transactions and asking prices.

Hospitality

13

Overseas investors are targeting hotel opportunities across


all UK regions, buoyed by the sustained strength in hotel
operating performance and the good availability of debt and
equity financing.

Research Services

15

CAPITAL MARKETS CONTACTS


Jason Winfield
Head of Investment Agency, UK
jason.winfield@cushwake.com
Patrick Knapman
Head of UK Retail Investment
patrick.knapman@cushwake.com
Barry ODonnell
UK shopping centres and in town retail
barry.odonnell@cushwake.com
James Beckham
Central London
james.beckham@cushwake.com
Jason Winfield
Regional offices
jason.winfield@cushwake.com
Mark Webster
Industrial & Logistics
mark.webster@cushwake.com
Adam McMillan
Banking Resolution
adam.mcmillan@cushwake.com
Edward Daubeney
Debt Advisory
edward.daubeney@cushwake.com

UK PROPERTY INVESTMENT

PRIME PROPERTY PERFORMANCE ALL SECTORS

UK investment volumes reached record levels in 2015,


boosted by the completion of several large transactions, as
well as greater activity in second-tier and secondary
markets. With demand intense, yields have been driven to
new lows in some parts of the market, although some
investors are now pausing for breath and are re-evaluating
their views on pricing and risk, especially in secondary
markets. This is partly due to heightened global uncertainty,
while some investors also have concerns over the potential
implications of Brexit now that a date for the referendum
has been set.
Occupier fundamentals continue to strengthen and demand
across UK regions is holding up, supporting good to strong
rental growth across all segments. Performance in many of
the best markets is now largely driven by rental growth and
less so by yield compression. According to the IPD UK
Monthly Property Index, UK property returned 13.8% in 2015,
down from 19.5% in 2014. Offices remain the strongest
performer of the three main commercial property sectors,
with total annualised returns of 18.2%, while the industrial
sector returned 17.3%. As has been the case in recent years,
the retail sector continues to lag behind, with the sector
returning 8.9% in 2015.
The UK investment market saw a broadening of the investor
base in 2015, with rising demand from both core and
opportunistic buyers. Despite the increase in global volatility,
institutions and property funds are still seeing strong capital
inflows from retail investors, who remain convinced by the
perceived value of UK property over other asset classes.
Private equity buyers from the US in particular are very
active across all sectors, with strong interest in opportunities
that offer asset management and/or redevelopment
potential. Slower growth in China has resulted in some Asian
investors withdrawing from the UK market, although these
have already been replaced by new entrants from the
region, with increased flows being seen from Taiwan, Hong
Kong and Singapore. Similarly, while persistently low oil
prices has resulted in a drop in capital from sovereign wealth
funds, there has been an increase in private wealth
diversifying away from the region and targeting Central
London assets in particular.
Most prime markets across the UK continue to see tight
investment supply levels, although the situation appears to
be easing in some locations as more vendors look to
capitalise on the high demand and robust pricing.
Furthermore, improved confidence in the underlying
strength of occupational markets and greater tolerance for
risk is also helping to boost liquidity, with some investors
now more willing to sell prime assets to take advantage of
attractively priced opportunities in second-tier and
secondary locations.

Source: Cushman & Wakefield

PRIME HEADLINE INVESTMENT YIELDS (DEC 2015)

Source: Cushman & Wakefield

PRIME RENT & YIELD MOVEMENTS TO DEC 2015


Prime sample of 75 centres, (18 in Central London)

Rental Growth to Dec 2015


3 years (pa)

One year

One quarter

Shops

3.8%

7.9%

1.1%

Industrial

2.6%

3.7%

0.6%

Offices (all UK)

6.3%

7.4%

1.1%

Offices-Central London

8.3%

10.0%

1.5%

Dec 13

Dec 14

Dec 15

Shops

5.78%

5.60%

5.32%

Industrial

6.79%

5.92%

5.68%

Offices (all UK)

6.16%

5.79%

5.53%

Offices-Central London

4.72%

4.42%

4.08%

Average Prime Yields

Source: Cushman & Wakefield

A Cushman & Wakefield Research Publication

Sector Trends

INVESTMENT PERFORMANCE COMPARED

Having been less favoured by investors in recent years, the


regional high street sector made a strong recovery in 2015,
with UK institutions, property companies and overseas
private equity showing good appetite for well-let units in
prime and, increasingly, in second tier locations. Investors
are growing more confident in the underlying strength of
the high street occupational market, which is boosting
activity in the sector. Furthermore, high street retail is
relatively cheap when compared with other sectors, with the
sector still offering strong potential for capital and rental
growth.
Investment demand for prime UK shopping centres is
healthy, with large lot sizes generating competitive bidding,
while buyers have also shown good appetite for welllocated, mid-sized schemes. Demand for secondary centres
which is mainly driven by private equity and asset
managers has become more selective, however, with
investors more wary on pricing and, consequently, yields
have begun to drift out. Funds are still the main buyers in
the prime out of town retail segment, but demand is
becoming increasingly selective for poorer quality parks in
prime locations. Private equity and opportunity funds are
active in second tier and secondary locations, with wellpriced assets seeing healthy bidding.
Central London offices are still seeing high demand and
while safe haven status and rental growth will maintain
strong investor interest, occupational activity may ease, at
least in the months ahead, due to the uncertainties posed by
the debate on Britains membership of the EU. The regional
office market is also performing strongly, despite some
moderation in demand recently, mainly due to institutions
taking a break to digest changes in the market. UK property
companies and international private equity funds are still
very active and are targeting attractively priced
opportunities in non-core markets. 2015 saw a steady
increase in risk tolerances and there are now more investors
willing to consider opportunities higher up the risk curve,
including shorter income stock, well-located secondary
assets and, more recently, joint venture funding deals with
developers.
Industrial assets are a top target for investors, but prime
supply remains very tight and there are 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. Activity
has focused heavily on distribution warehouses, but there
has also been strong institutional interest in prime multi-let
estates, particularly in the South East. There have been
some institution/asset manager joint ventures in H2 2015,
which have targeted well-located secondary estates in areas
of tight supply, which offer strong prospects for rental and
capital growth over the medium term.

Source: IPD, Macrobond

NET INVESTMENT & CHANGE IN OUTSTANDING


BANK LENDING TO PROPERTY

Source: Cushman & Wakefield

PRIME RENTAL GROWTH BY SECTOR

Source: Cushman & Wakefield

ECONOMIC OVERVIEW

ECONOMIC INDICATORS

Initial estimates from the Office of National Statistics (ONS)


showed that the UK economy expanded by 0.5% in the final
quarter of 2015, which is close to its long term trend. GDP
growth figures for the second and third quarters of 2015 have
been revised down, however, with the data continuing to
highlight the divergence between weak external demand and
the ongoing strength of the domestic economy. GDP growth
is estimated to have been 2.2% in 2015, down from 2.9% in
2014, with consumers and investment still the main drivers of
growth.
Consumer spending growth is estimated to have been 3% in
2015, the strongest annual performance since 2007.
Consumer confidence is high and stable, underpinned by
robust job creation, rising house prices, near zero inflation
and exceptionally loose monetary policy. Retail sales were up
2.6% y/y in December, according to the ONS, marking the
32nd consecutive month of growth. Online sales increased by
8.2% during the same period. With the exception of the food
sector, all product categories are contributing to growth,
with furniture and clothing the strongest performers.
Business investment has held up strongly, despite the
increased international risks relating to China and other
emerging markets. The domestic environment is favourable
for UK businesses, with profitability levels back near previous
peaks and many companies having large financial surpluses.
The corporation tax rate cut announced in the summer
budget is also expected to underpin steady growth in the
sector in 2016. Concerns over Brexit have started to increase
now that a date has been set, and this issue could potentially
weigh on business confidence and activity, particularly in the
second quarter ahead of the June 23rd vote.

Source: ONS

CHANGING FORECASTS FOR UK GDP GROWTH

Monetary policy is
expected to remain highly
accommodative in 2016

2015
Source: Consensus Forecasts

Despite some tentative signs of recovery in Q4, the export


sector was the weakest performing sector of the economy in
2015, with the sector being weighed down by the strength of
the pound and weakening global demand. Manufacturing
growth was relatively subdued at 1.2%, but this masks a
divergence in performance between the different
manufacturing sectors, with those sectors exposed to oil and
gas struggling, while those consumer facing, such as
automotive, are faring much better on the back of healthy
labour market conditions.
Monetary policy is expected to remain highly accommodative
in 2016, with the Bank of England indicating that there will be
no increase in interest rates from the current record lows,
until there is evidence of sustained growth in wages. The
consensus view seems to be that any hikes will not be until
Q4 2016 at the earliest. Factors such as government
spending cuts, global economic uncertainty and Brexit all
represent downside risks to economic growth in 2016.

ECONOMIC SUMMARY
Economic Indicators
2012

2013

2014

2015E

2016F

GDP Growth

0.7

1.7

2.9

2.2

2.2

CPI Inflation

2.8

2.5

1.5

0.0

0.5

Consumer Spending

1.5

1.7

2.6

3.0

2.8

Corporate Investment

0.7

3.4

7.3

4.4

4.8

Manufacturing Output

-1.3

-0.7

1.3

1.2

0.8

Interest rates 3 month

0.5

0.5

0.5

0.6

0.6

Interest rates 10 year

2.1

2.8

2.6

1.9

2.1

Source: Consensus Forecasts

A Cushman & Wakefield Research Publication

PROPERTY FINANCE
The UK lending environment remains positive, with Cushman
and Wakefields recent European Lending Trends report
indicating that the majority of lenders expect to maintain or
expand their activities in 2016. With confidence high, lenders
are still showing a healthy appetite for new loan origination
albeit the pace of growth is expected to ease in the first
half of 2016 while refinancing activity has remained stable.
There are still some challenges for borrowers in raising
development finance for regional opportunities, with fewer
lenders active in this segment and pre-lets still a prerequisite for many finance providers.
Banks made a strong return to the market in 2015 and have
been competing hard with non-bank lenders, including
institutions, debt funds and private equity. While the
majority of market participants are involved in the senior
debt segment, there has been a strong increase in the
number of lenders involved in the whole loan financing
segment as they search for higher returns. In many cases,
this can involve syndicating the senior or mezzanine tranche.
The mezzanine finance market on its own is also highly
competitive, with the attractive risk-adjusted returns on
offer especially in the regions proving tempting for a
broad range of providers.
Average loan to value (LTV) ratios for senior debt remained
relatively stable at 60-70% in 2015, with debt funds typically
willing to lend at higher LTVs compared to commercial
banks and institutions. Competitive bidding has ensured that
average senior debt margins on core assets still range
between 125bps to 200bps. Generally, commercial banks are
willing to lend at margins of less than 200bps, with
institutional margins ranging between 300-400bps, while
debt fund margins are typically in excess of 400bps. Some
parts of the UK market did see an increase in pricing in Q4
2015, with margins in London, for example, rising by an
average of 25bps over the quarter. This is expected to have
been a short term blip, however, rather than being part of a
longer term trend.

YIELDS AND INTEREST RATES

Source: ONS, Cushman &Wakefield

There has been a strong


increase in the number
of lenders involved in
the whole loan
financing segment
Regional markets continue to see healthy levels of finance
and liquidity, as lenders target higher returns. There is strong
appetite for lending against prime assets in tier 1 cities,
although some lenders are also showing good interest in
secondary assets in these prime locations. There is also
some interest in good quality stock in secondary markets,
although demand remains highly selective for this part of
the market.
The total volume of closed real estate loan and REO (real
estate owned) sales across Europe reached 85.9 bn in
2015, which was a 4.5% increase on 2014. The UK and Irish
markets accounted for 71% of all closed transactions during
the year, with Q4 2015 being the busiest quarter ever
recorded. A total of 39.4 bn of transactions were
completed in Q4, with several significant deals closing,
including UKARs Granite Portfolio (17.8 bn) and NAMAs
Project Arrow (6.3 bn). With many of the big players such
as Lloyds Banking Group and RBS almost at the end of their
deleveraging programmes, asset management agencies
(AMA) are becoming increasingly important for new supply.
AMA accounted for 38% of the total volumes transacted in
2015, with UKAR and NAMA alone accounting for 30.5bn
of sales. US private equity firms, including Cerberus and
Lone Star, were the main buyers in 2015. Similar levels of
activity are forecast for 2016, with a large pipeline of live
and planned deals currently being tracked by Cushman &
Wakefield, with the UK, Ireland, Spain, the Netherlands and
Italy expected to be the most active markets.

INDUSTRIAL
Occupier demand in the logistics sector remains strong and
continues to be driven primarily by the fast growing
e-commerce industry and third party logistics providers
(3PLs). While much of the demand is still focused on modern,
big box space, there is also healthy demand for mid box
space and cross dock facilities as occupiers look for
opportunities to optimise their distribution networks across
the UK. Take-up has been boosted by greater activity in the
secondary market, with occupiers continuing to broaden their
search criteria to access suitable stock across all size ranges.
Some parts of the manufacturing sector, such as automotive,
are also generating healthy demand for large warehousing
space, particularly in the Midlands region. The multi-let sector
is seeing stronger demand across most regions, but most
notably in the South East.
Speculative big box development activity has picked up
strongly in recent quarters, with growing appetite for
developing schemes in locations outside of the M1/M6/M25
corridors. Occupiers have been holding back from build-tosuit schemes in areas where preferable speculative
development is increasing most notably in the South East
- although the competition for these new units is intense and
many are being snapped up quickly for occupation. The big
box market is still recording rental growth in key regional
locations, while rising demand and a lack of development is
maintaining the upward pressure on headline rents in the
multi-let sector. Incentives are still being compressed, albeit
they have limited capacity to tighten further.

Investors continue to
compete hard for the
limited prime stock
Investment appetite for industrial assets remains robust, with
overseas investors continuing to compete hard with UK
institutions and private investors for the limited prime
opportunities. Whilst demand remains for Greater London
and South East multi-let stock and prime logistics locations
across the country, UK institutions have become increasingly
selective as vendor expectations have strengthened and cash
inflows have declined. Nevertheless, a reduced (when
compared with Q4 2014) stream of single-let distribution and
multi-let portfolios being brought to market in the final
quarter of 2015 has underpinned strong transactional activity
across all regions. Examples of this in Q4 included TH Real
Estates acquisition of four assets within the Click distribution
warehouse portfolio for 87 mn from Prologis and DTZ
Investors acquisition of four assets within the Wellington
multi-let portfolio for 82.5 mn from Threadneedle.
Activity in the secondary markets remains healthy, with a
broad range of buyers targeting these markets and taking
advantage of higher yield profiles, where performance is
driven primarily by the currently strong occupational markets.
Activity has focused on short to mid-term distribution
warehouses in strong locations and well-let regional multi-let
estates, with recent examples including the MStar Portfolio
acquired by IO Asset Management for 76 mn and the
Cordatus acquisition of the Lion Portfolio for 25.7 mn.

ANNUAL CHANGE IN INDUSTRIAL RENTS


TO DEC 2015

Source: Cushman & Wakefield

PRIME INDUSTRIAL RENTS AS AT DEC 2015


(10,000 sq.m unit)

London Heathrow

Rental Level

PA Growth
Shortterm
5 years 1 year Trend

/sq.ft/yr

/sq.m/yr

13.75

201

2.2

3.8

Manchester

6.25

91

2.5

0.0

Birmingham

6.50

95

1.5

8.3

Nottingham

5.75

84

1.5

8.3

Bristol

8.00

117

2.6

3.2

Leeds

5.75

84

2.7

9.5

Newcastle

5.10

74

3.5

2.0

Cardiff

6.00

88

1.7

9.1

Edinburgh

6.75

99

-2.0

3.8

Glasgow

6.00

88

0.0

0.0

Source: Cushman & Wakefield

PRIME INDUSTRIAL YIELDS AS AT DEC 2015


Yield Level
Current

10 Year Record

Last
Quarter

High

Low

Shortterm
Trend

London Heathrow

4.75

4.75

7.00

4.75

Manchester

5.50

5.50

7.75

5.25

Birmingham

5.25

5.25

8.00

5.00

Nottingham

5.75

5.75

8.00

5.25

Bristol

6.00

6.00

8.00

5.25

Leeds

6.00

6.00

8.25

5.25

Newcastle

6.50

6.50

8.50

5.75

Cardiff

6.50

6.50

8.50

5.50

Edinburgh

6.00

6.00

8.75

5.00

Glasgow

6.50

6.50

8.50

5.50

Source: Cushman & Wakefield

A Cushman & Wakefield Research Publication

REGIONAL OFFICES

ANNUAL CHANGE IN OFFICE RENTS TO DEC 2015

Regional office leasing activity held up strongly in 2015, with


total take-up for the year reaching 5.6 mn sq.ft, the second
highest volume on record. Of this total, 2.4 mn sq.ft was
Grade A stock, with high demand for tier 1 locations such as
Manchester and Birmingham, while other smaller tier 1 cities
such as Edinburgh, Leeds and Cardiff also performed
strongly. Activity in the regions has in part been supported
by the movement of staff away from the increasingly
expensive and supply constrained markets in Central
London and the South East, with pre-lets also a factor in
boosting regional take-up volumes.
The availability of Grade A space continued to fall in Q4,
with a number of locations now facing very low levels of
supply. Based on current demand, Leeds had only six
months of Grade A supply left at the end of 2015, while
Birmingham, Bristol, Cardiff, Edinburgh and Newcastle all
have just over a years supply of prime space remaining.
Developers and funds have responded cautiously to these
dwindling supply levels in recent years, but activity is
expected to increase substantially over the next three years,
with an estimated 5.8 million sq.ft of new space due to be
completed speculatively. Given the depth of demand for
large, modern space, a significant proportion of space under
construction has already been pre-let, with around 40% of
new space due for completion in 2016 already taken.

Favourable occupational
trends underpinning an
increase in risk appetites
Most UK regions are seeing upward pressure on rents and
incentives are being gradually tightened. Further growth in
rents is anticipated as new, higher quality projects come
on-line and competition over suitable available space
intensifies.
Regional office investment volumes were 8.35 bn in 2015,
the highest annual total since 2006, although this masks a
slowdown in H2 2015, as UK institutions took their foot off
the throttle. This pause in the market is likely to be short
lived, although the uncertainty around Brexit in H1 2016 may
impact on the amount of capital targeting the office sector.
Buying patterns indicate that much of the demand is still
focused on prime assets in tier 1 cities, although the best
stock in tier 2 cities is also generating healthy demand and
competitive bidding. The favourable occupational backdrop
has underpinned a steady increase in risk tolerances, with
more investors willing to consider opportunities higher up
the risk curve. Prime regional office yields were relatively
stable throughout the second half of 2015, although there
are some signs that investors may be re-evaluating their
views on pricing and risk amid growing concerns over global
volatility. Cushman & Wakefield forecast that prime regional
office yields will remain relatively unchanged across most
markets in 2016, with some softening in yields anticipated in
2017.

Source: Cushman & Wakefield

PRIME OFFICE RENTS AS AT DEC 2015


Rental Level

PA Growth (%)
1 year

Shortterm
Trend

3.4

1.5

3.4

6.3

438

1.7

5.3

416

0.7

1.8

394

1.5

3.8

/sq.ft/yr

/sq.m/yr

5 year
compound

Reading

34.00

497

Manchester

34.00

497

Birmingham

30.00

Bristol

28.50

Leeds

27.00

Newcastle

22.00

321

1.8

2.3

Cardiff

24.00

351

2.6

9.1

Edinburgh

32.50

475

3.2

8.3

Glasgow

29.50

431

1.7

0.0

Source: Cushman & Wakefield

PRIME YIELDS AS AT DEC 2015


Current

Yield Level
Last Quarter

High

10 Year Record
Low

Shortterm
Trend

Reading

4.90

4.90

7.50

4.90

Manchester

5.00

5.00

7.25

4.75

Birmingham

5.00

5.00

7.00

4.75

Bristol

4.85

4.85

7.25

4.75

Leeds

5.00

5.00

7.50

4.75

Newcastle

5.75

5.75

7.50

5.00

Cardiff

5.50

5.50

8.00

5.00

Edinburgh

5.25

5.25

7.25

4.75

Glasgow

5.50

5.50

7.50

4.50

Source: Cushman & Wakefield

LONDON OFFICES

LONDON OFFICES PERFORMANCE

An estimated 12.3 mn sq.ft of occupational space was


transacted in 2015, marking the third consecutive year of
above average leasing volumes. Both the West End and City
office markets saw a decrease in volumes y/y, in part due to
a lack of stock, but East London markets performed
strongly, with activity up by more than 50%. This was mainly
due to increased activity in Stratford, where both the FCA
and Tfl took large pre-lets. Pre-lets remain an important
driver of activity, particularly for larger occupiers, and
accounted for around a quarter of leasing volumes last year.
There were nine pre-lets completed for units over 100,000
sq.ft, while there were more off-plan pre-lets in 2015 than in
any year since 2000/2001.
The market remains characterised by low levels of supply,
which stood at 9.4 mn sq.ft at the end of 2015, equating to a
vacancy rate of just under 4%. The lack of speculative
development was particularly acute in 2015, with just 1.6 mn
sq.ft of space completed against a 10-year average of 2.5 mn
sq.ft and the lowest level since 2007. Construction activity is
starting to pick up in response, however, with 8 mn sq.ft now
under construction across London. 100 Bishopsgate is the
largest scheme onsite, which currently will provide 580,000
sq.ft of speculative space following the pre-let to Royal Bank
of Canada.
Rents continue to rise, with the strongest rental growth in
2015 recorded in the emerging markets such as Aldgate &
Whitechapel, Clerkenwell & Shoreditch and Kings Cross. The
differential between the traditional core office markets and
emergent ones is reducing, with rents in the City core at
66.50 per sq.ft compared with Clerkenwell & Shoreditch,
which is now at 62.50 per sq.ft.
Investment volumes were 22 bn in 2015, the third
consecutive year in which volumes exceeded 20 bn and
significantly above the long term average of 16.1 bn.
Foreign investors accounted for 67% of all transactions
compared to 69% a year earlier led by strong activity
from Asian and North American investors. Domestic
investors are increasingly active, especially property
companies, even if this is not fully reflected in the volumes.
Larger assets are being targeted as investors look to deploy
capital quickly, reflected in robust demand for City offices in
particular.
As capital values increase, some profit taking is evident, with
many investors seeking to reinvest to aid the diversification
of their portfolio. 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 Q4, with prime City yields unchanged at 4.00% while
prime West End yields remained at 3.25%.

Source: Cushman & Wakefield

PRIME LONDON OFFICE RENTS AS AT DEC 2015


/sq.ft/yr

Rental Level
/sq.m/yr

5 year

1 year

Shortterm
Trend

125.00

1,826

6.8

8.7

Victoria

82.50

1,205

7.0

6.5

City Core

66.50

971

4.2

7.3

Clerkenwell/
Shoreditch

62.50

913

9.3

13.6

Midtown

65.00

949

5.2

6.1

Paddington

62.50

913

4.6

8.7

Mayfair &
St James

PA Growth

Source: Cushman & Wakefield

PRIME LONDON OFFICE YIELDS AS AT DEC 2015


Yield Level

10 Year Record

Current Last Quarter

High

Low

Shortterm
Trend

Mayfair &
St James

3.25

3.25

6.00

3.25

Victoria

4.00

4.00

6.50

4.00

City Core

4.00

4.00

6.75

4.00

Clerkenwell/
Shoreditch

4.25

4.25

7.75

4.25

Midtown

4.00

4.00

7.00

4.00

Paddington

4.50

4.50

7.00

4.50

Source: Cushman & Wakefield

OFFICE AVAILABILITY AND DEMAND


Availability (mn sq.ft)
Jun 15 Sep 15

Dec 15

Take-up (mn sq.ft)


Q2 2015 Q3 2015 Q4 2015

City & East


London

7.26

6.85

6.77

2.85

2.19

2.06

West End

2.79

3.05

3.49

0.84

0.99

1.04

Source: Cushman & Wakefield

A Cushman & Wakefield Research Publication

RETAIL
High Street Central London
London continued to attract high numbers of overseas
visitors throughout 2015, with annual sales growth reaching
its highest level since 2006. Occupational demand remains
robust and is driven mainly by overseas retailers, with
previously strong demand from UK fashion retailers such as
All Saints, Jack Wills and Cult/Superdry having waned
recently. The major grocery retailers in the UK are still
seeking to extend their Central London presence through
local convenience stores and continue to bid aggressively
for the best locations. Most streets are seeing strong
demand and rental growth, but the areas that have
performed particularly well are those under single estate
ownership. Record rental levels were achieved on many of
the main thoroughfares in 2015, but niche locations in
Central London such as Marylebone High Street, Belgravia,
Mount Street, Jermyn Street and Burlington Arcade have
also witnessed strong rental growth.
The weight of capital targeting Central London retail assets
remains very high, despite the lack of opportunities and low
yields on offer. Prime yields are at the lowest levels on
record, although this has yet to deter investors, who remain
confident in the wealth preservation qualities of these assets
and the prospects for further rental growth at rent review.
There is also healthy appetite for opportunities outside the
prime core, including assets that offer asset management
potential in less popular streets, which is maintaining
downward pressure on yields across all locations.

High Street Regional


Occupational demand has been healthy in recent months,
with new and existing retailers actively looking to open new
stores. One recent new entrant is Pep & Co, which has
launched its brand in 50 locations nationwide, while more
established retailers such as Holland & Barrett, Joules,
Paperchase and Office continue to search for opportunities
to expand their store portfolios. Most of the demand is still

ANNUAL CHANGE IN SHOP RENTS TO DEC 2015

centred on prime space in the top 25 regional locations, but


as availability falls, more retailers are willing to consider
space in the better performing second tier locations.
Demand in secondary markets is slowly improving, albeit it
is still highly selective, and is driven mainly by discounters.
Prime rents and incentives are generally stable, although
rents in the strongest towns are expected to remain under
upward pressure in 2016.
2015 was a very positive year for the high street investment
market, with total volumes for the year estimated to have
reached 1.4 bn, the strongest performance since 2010.
Investor appetite for prime regional shops is strengthening,
especially for lot sizes in excess of 15 mn, with UK
institutions very active in this segment of the market.
Overseas investors have also been more active recently, and
are predominantly targeting well-let units in prime and in
some second tier locations. Demand for secondary stock is
selective, but slowly improving, with a growing number of
opportunistic buyers targeting properties that offer asset
management angles.

PRIME RETAIL RENTS AS AT DEC 2015


Note: Zoning
bases differs
between cities
London-West End

Rental Level
Zone A
/sq.ft/yr

/sq.m/yr

5 year

1 year

Shortterm
Trend

1,500

13,145

9.6

20.0

London-City

260

1,937

3.9

0.0

Manchester

270

2,011

1.6

8.0

Birmingham

225

1,676

-2.1

0.0

Bristol

150

1,117

-1.3

3.4

Leeds

250

1,862

0.0

0.0

Newcastle

240

1,788

-0.8

6.7

Cardiff

220

1,639

-1.8

2.5

Edinburgh

210

2,109

2.0

10.5

Glasgow

260

2,611

0.8

2.0

Source: Cushman & Wakefield


Note: /sq.m/year figures are on an equivalent non-Zone A basis

PRIME RETAIL YIELDS AS AT DEC 2015


Yield Level

Source: Cushman & Wakefield

10

PA Growth

Current

Last Quarter

10 Year Record
High

Low

Shortterm
Trend

London-West End

2.25

2.25

4.25

2.25

London-City

4.50

4.50

6.50

4.50

Manchester

4.50

5.00

6.75

4.25

Birmingham

4.75

5.25

6.75

4.25

Bristol

5.25

5.50

6.75

4.50

Leeds

4.75

4.75

6.25

4.25

Newcastle

4.75

5.25

6.25

4.00

Cardiff

5.00

5.00

6.50

4.00

Edinburgh

4.75

5.00

7.00

4.00

Glasgow

4.50

4.50

6.75

4.00

Source: Cushman & Wakefield

CHANGE IN RETAIL YIELDS AS AT DEC 2015

PRIME YIELDS AS AT DEC 2015


Yield Level
Current Last Quarter
Shopping Centres

4.25

4.50

10 Year Record
High

Low

Shortterm
Trend

7.00

4.25

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

Source: Cushman & Wakefield

Source: Cushman & Wakefield

Shopping Centres
Occupier demand remains centered on prime shopping
centres in the South East and other prime regional locations,
with demand more selective elsewhere. Prime rents were
relatively stable across most locations in 2015, but some
secondary schemes are still struggling to maintain current
rental levels, amid poor demand and rising vacancy.
Developers are still favouring extensions and improvements
to existing schemes and this is expected to remain the main
source of new supply in the short term.
UK shopping centre investment volumes reached 925.8 mn
in Q4 2015, which took total volumes for 2015 to 4.1 bn, a
31% drop from 2014, but 4% up on the 10 year average.
While demand for prime stock remains healthy and is
increasingly diverse, the lack of stock has weighed on
activity levels. A number of significant deals have been
carried over to 2016 and a strong first quarter is expected.
Demand for secondary stock, which is mainly driven by
private equity and asset managers, has become more
selective and buyers are increasingly wary on pricing,
especially for the weaker schemes.
The most significant transaction in Q4 was the purchase of
Festival Place in Basingstoke by AEW for 275.5 mn, at a net
initial yield of 6.22%. Yields hardened across all shopping
centre segments in 2015, with super prime and prime yields
contracting by 25bps to 4.25% and 5.00%. Dominant
secondary schemes recorded the largest inward movement,
with yields sharpening by 75bps to 6.00%. Secondary and
tertiary schemes saw yields harden 50bps to 7.75% and
8.25% respectively.

Out of Town Retail


Out of town retail vacancy rates have been steadily falling, in
part due to improving economic activity but also due to
changing consumer trends and store formats. The sector
continues to see rising footfall against declines in other
sectors, with a wide array of retailers reporting expansion
plans and new store formats, which has translated into
rental growth in some subsectors. Recent announcements
such as the continued integration of Currys PC World /
Carphone Warehouse, Wesfarmers purchase of Homebase
from Home Retail Group, Sainsburys pursuit of Argos and
the recent collapse of Brantano demonstrates the continuing
evolution of the market. Retailers continue to optimise their
store network with the continuing blurring of lines between
in town, out of town and digital retailers and formats.
Retail warehouse investment volumes were 3.63 bn in 2015,
which was a 27% increase on 2014 volumes and the highest
annual total since 2006. Funds were the dominant buyers in
2015, accounting for 57% of all acquisitions, with private
equity and REITs accounting for 16% and 12% respectively.
Funds, such as Aberdeen Asset Management, were the most
active sellers throughout the year. While the availability of
modern, Grade A schemes is still tight, the positive
occupational backdrop has driven an improvement in risk
appetites, with healthy interest in attractively priced assets
in second tier and in some secondary locations. Prime yields
are stable at 4.50% for open A1 parks and 5.50% for bulky
goods parks, while the best secondary stock is currently
trading at yields of 7.00%+.

11

A Cushman & Wakefield Research Publication

LONDON RESIDENTIAL
House prices rose steadily across the UK in Q4 2015, with
near record low supply levels, combined with rising demand,
maintaining upward pressure on prices. According to data
from the Land Registry, average national house prices were
up 6.4% y/y in December 2015, while average house prices in
London were up 12.4% over the same period.
The London market continues to outperform, but it is
becoming increasingly fragmented, with a growing
divergence in performance at the submarket level. Some of
the strongest growth in pricing and activity is being
recorded in outer London boroughs, with Prime Central
London (PCL) continuing to see a decline in the number of
transactions and asking prices. The PCL market is still
absorbing the impact of the Stamp Duty Land Tax (SDLT)
changes, while other policy changes from 2015 have also
weighed on buyer confidence, leading to purchasers
becoming particularly price sensitive, with a greater focus
on best-in-class properties. Across Londons 20 outer
boroughs, annual price growth in the year to December 2015
averaged 10.9%, compared with 7.8% in inner London and a
generally flat performance in PCL.
The London lettings market is still performing well, with
good appetite for rental units in both PCL and the
mainstream London market. Young professionals are active
across most submarkets, with demand being driven by high
employment levels and sustained growth in real wages.
Growing global economic uncertainty has caused the
corporate sector to re-evaluate relocation and rental
budgets, with activity notably more cautious in recent
months. In PCL, tenants are increasingly looking to
negotiate, with 59% of lettings agreed at below asking price
in Q4 2015 according to Lonres.
Despite growing concerns over the lack of skilled labour, as
well as the rising costs of construction, London residential
development activity in 2015 enjoyed its strongest year
since the financial crisis in regards to new homes starts and
sales. There is growing appetite for lower cost opportunities
outside of PCL, with activity especially strong in East
London boroughs such as Tower Hamlets, Newham and
Greenwich and in other boroughs such as Wandsworth
and Southwark. The new Housing and Planning Bill in
October 2015 introduced a number of new measures to
boost housing supply, which were generally well received. In
particular, the decision to make Permitted Development
Rights (PDRs) permanent has removed a lot of uncertainty
from the market and is expected to be a key driver of
residential development activity in 2016, with developers
attracted to such schemes, due to their highly accessible
nature and relative affordability, whilst yields have also
proved attractive to investors.

London residential
development activity
in 2015 enjoyed its
strongest year since
the financial crisis in
regards to new homes
starts and sales

UK ANNUAL HOUSE PRICE INFLATION


(ALL DWELLINGS)

Source: ONS

UK ANNUAL HOUSE PRICE INFLATION


(BY TYPE OF BUYER)

Source: ONS

12

HOSPITALITY
UK hotels enjoyed steady growth in revenue per available
room (RevPAR) and gross operating profit per available
room (GOPPAR) in 2015, with hoteliers benefitting from the
strength of the economy, falling oil prices and low inflation.
Further, albeit more modest, growth is anticipated for 2016,
with the increased competition from new supply and
heightened global uncertainty expected to weigh on future
performance.
The London market performed solidly in 2015, albeit not as
strongly as in recent years, with the Rugby World Cup
providing a boost to the market in September/October and
helping offset some sluggishness in the sector from H1 2015.
The mid-market sector has been struggling in the face of
intense competition from budget operators and alternative
accommodation providers, such as Airbnb, while the
strength of the pound has also impacted. Nevertheless,
Londons performance metrics are still healthy by historical
standards, with average occupancy rates, for example,
forecast to reach 84% in 2016, which would be the highest
level since the mid 1990s.

UK HOTEL PERFORMANCE Q4 2015


% Change Y-O-Y

% Change
Q-O-Q

Market

RevPar

ARR

Occupancy

Supply

London

2%

4%

-2%

2%

Birmingham

7%

6%

1%

2%

Manchester

6%

6%

0%

1%

Leeds

4%

5%

-1%

0%

Newcastle

3%

9%

-6%

14%

Edinburgh

3%

3%

0%

2%

Aberdeen

-36%

-29%

-10%

6%

Glasgow

-3%

0%

-2%

1%

Belfast

4%

4%

0%

0%

Liverpool

3%

1%

2%

2%

20%

17%

1%

0%

8%

6%

2%

5%

Cardiff
Bath

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

In the regions, several cities recorded high single digit and,


in some cases, double digit RevPAR growth in 2015.
Birmingham has been one of the strongest performers and
has benefitted hugely from the airports runway extension in
2014, which has led to a significant increase in the number
of direct flights from Asian cities, such as Beijing. Outside of
the major cities, Cardiff, Bristol, Bath, Belfast and Coventry
have also recorded strong performances. Aberdeen has
underperformed, however, as the combination of high
supply and prolonged weakness in the oil industry continues
to undermine performance.
The investment market had a very strong year, with volumes
estimated to have reached 10 bn, which is well above the
5.5 bn recorded in 2014. The investment market remains
vibrant, with high volumes of cross border capital targeting
both London and regional hotel markets. Investors are
confident in the longer term prospects for the hotel sector,
buoyed by the sustained strength in hotel operating
performance and also the increased availability of debt and
equity financing.
Asian investors have become increasingly active, while
North American buyers are also active and are
predominantly private equity groups, including KSL, Lone
Star, Cerberus and Starwood Capital. Volumes have been
boosted by the completion of several large portfolio
transactions, including Apollos acquisition of LRG Portfolio
Three and Singha Estate/Fico Corporations acquisition of
the Jupiter hotel portfolio. While portfolios have dominated
activity, there is also strong appetite for prime single asset
deals across all UK markets.

13

A Cushman & Wakefield Research Publication

QUARTERLY MARKETBEAT December 2015


RENTAL
GROWTH

EA

EM

NW

SE

SW

WM

YH

GB

Retail
Base

5.2%

4.5%

4.3%

4.7%

4.6%

6.0%

4.4%

3.8%

4.4%

5.4%

5.5%

10 Years

-1.6%

-3.5%

-2.7%

-2.4%

-0.2%

3.2%

-2.8%

-4.8%

-3.4%

-1.4%

1.1%

5 Years

-1.2%

-1.2%

-0.6%

0.3%

0.2%

4.9%

-2.2%

-3.2%

-2.7%

-0.1%

2.9%

3 Years

-0.3%

-1.7%

-0.3%

1.5%

0.8%

5.7%

-1.2%

-4.6%

-1.4%

1.1%

3.8%

1 Year

1.9%

0.0%

4.1%

9.7%

4.3%

9.9%

2.8%

-0.2%

0.0%

2.0%

7.9%

6 Mths

0.0%

0.0%

3.0%

7.4%

0.8%

2.9%

2.8%

1.5%

0.0%

0.0%

2.7%

1 Qtr

0.0%

0.0%

0.0%

0.0%

1.7%

1.4%

0.0%

0.0%

0.0%

0.0%

1.1%

Base

5.7%

5.7%

5.8%

5.8%

5.8%

4.9%

5.6%

5.2%

5.9%

4.8%

5.0%

10 Years

2.6%

0.7%

1.2%

1.9%

2.8%

4.4%

1.0%

2.0%

0.5%

1.7%

3.6%

5 Years

2.6%

0.4%

1.8%

0.8%

10.5%

6.3%

1.0%

1.6%

2.3%

2.7%

5.3%

3 Years

3.6%

0.6%

3.0%

2.2%

16.5%

7.2%

1.7%

1.7%

3.5%

4.1%

6.3%

Office

1 Year

4.1%

2.0%

2.3%

2.5%

1.1%

8.9%

3.5%

5.5%

3.9%

8.2%

7.4%

6 Mths

0.8%

0.0%

2.3%

2.5%

1.7%

5.1%

2.4%

5.5%

1.5%

6.5%

4.3%

1 Qtr

0.0%

0.0%

2.3%

2.5%

0.5%

1.2%

0.0%

5.5%

0.0%

0.0%

1.1%

Base

4.4%

4.3%

4.3%

4.2%

4.4%

4.8%

4.6%

4.1%

5.0%

4.3%

4.3%

10 Years

2.4%

0.7%

-0.2%

0.8%

2.0%

1.3%

-0.1%

-0.8%

0.8%

0.2%

1.0%

5 Years

2.4%

1.2%

1.9%

0.7%

-0.2%

2.9%

0.8%

-2.1%

0.9%

1.0%

1.7%

Industrial

3 Years

5.0%

1.4%

3.1%

1.4%

-1.8%

4.2%

0.3%

-2.6%

3.1%

1.5%

2.6%

1 Year

2.7%

1.5%

1.1%

0.4%

-1.2%

6.3%

1.0%

6.2%

4.2%

3.4%

3.7%

6 Mths

2.7%

0.0%

0.0%

0.0%

-1.2%

2.8%

0.0%

0.0%

2.0%

0.0%

1.5%

1 Qtr

1.3%

0.0%

0.0%

0.0%

-1.2%

1.1%

0.0%

0.0%

1.2%

0.0%

0.6%

AVERAGE PRIME YIELDS


Retail
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%

Dec-15

5.50%

5.92%

6.19%

6.08%

5.25%

4.66%

5.70%

6.75%

6.00%

5.69%

5.32%

Dec-14

6.05%

7.17%

5.90%

5.88%

5.58%

5.43%

6.94%

6.00%

6.50%

6.58%

5.79%

Mar-15

6.00%

6.92%

5.75%

5.88%

5.67%

5.32%

6.63%

5.75%

6.25%

6.53%

5.67%

Jun-15

5.92%

6.83%

5.75%

5.88%

5.67%

5.25%

6.46%

5.50%

6.08%

6.42%

5.59%

Sep-15

5.90%

6.67%

5.75%

5.88%

5.75%

5.21%

6.46%

5.50%

6.00%

6.25%

5.55%

Dec-15

5.88%

6.67%

5.75%

5.88%

5.75%

5.18%

6.46%

5.50%

6.00%

6.25%

5.53%

Dec-14

5.67%

5.50%

6.75%

5.96%

7.00%

5.42%

5.95%

6.75%

5.75%

6.19%

5.92%

Mar-15

5.67%

5.50%

6.75%

5.96%

6.42%

5.42%

5.95%

6.75%

5.75%

6.19%

5.89%

Office

Industrial

Jun-15

5.42%

5.33%

6.56%

5.75%

6.33%

5.18%

5.75%

6.58%

5.50%

6.00%

5.68%

Sep-15

5.42%

5.33%

6.56%

5.75%

6.25%

5.18%

5.75%

6.58%

5.45%

6.00%

5.67%

Dec-15

5.42%

5.33%

6.56%

5.75%

6.33%

5.18%

5.75%

6.58%

5.45%

6.00%

5.68%

GEOGRAPHICAL KEY FOR ALL GRAPHICS


EA = East Anglia
EM = East Midlands
N = North

14

NW = North West
S = Scotland
SE = South East

SE (ex-L) = South East (ex London)


SW = South West
W = Wales

WM = West Midlands
Y&H = Yorkshire & Humberside
WE of L = West End of London

SL = Suburban London
C of L = City of London
GB = Great Britain

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