UK property faces a “long and bumpy road to recovery” with modest growth in capital values in London in 2012 not enough to offset capital declines in the UK as a whole.
That was the picture painted this morning as Jones Lang LaSalle put a brave face on forecasts for a challenging year ahead and found causes for optimism, not least in the £1.5bn of investment deals the agent acted on in the final two weeks of the year.
In particular, while the first six months of the year will be “flat at best, with the possibility of a brief technical recession (two quarters of negative growth in 2011 Q4 and 2012 Q1) the second half should be brighter, driven by an “Olympics bounce” in Q3 and the benefits of another burst of asset purchases by the Bank of England.
Growing evidence of corporate inertia is set to continue into 2012, JLL predicts, with activity in the office and industrial sectors softening further and retailers recoiling from a tough end to 2011.
Investors too have become “more cautious, with figures suggesting that transaction volumes may not match 2010 out-turns."
Andrew Burrell, director – EMEA research, said the watchwords for the year would remain “delay and caution” for occupiers and investors.
Focusing on the capital markets, lead director Chris Ireland said that overall 2011 had not been “too bad” in terms of investment volumes and that 2012 was likely to be “a little bit more subdued” but still relatively solid.
However, Ireland said averages can be deceiving, with prime assets and locations propping up values and returns.
Ireland expects further falls next year driven by the softening of non-core yields in the industrial and retail sector as activity in the non-prime segment remains weak. Ireland said secondary values in particular were likely to fall between a further 5 and 10% in the first six months.
The impact on capital growth will be compounded by the lack of rental value growth across all segments.
Ireland said that encouragingly the agent had acted on the completion of £1.5bn of deals in the last two weeks of the year with a third of these taking place outside of London.
In offices, Neil Prime, head of office agency, pointed to weak demand increasing the market’s reliance on structural events. The first six months of the year will be driven by churn at the smaller end and lease renewals and extensions and there will be “few headlines” for the property press, Prime warned.
However, Prime said the “clock is ticking” for many corporates housed in often obsolete space where leases expire in 2014. JLL predicts that prelets will be increasngly on the agenda towards the end of the year although many companies will be concerned by the publicity generated by signing up for new space in difficult times.
“Occupiers are in a real quandary on this issue,” Prime said, particularly as Grade A vacancy remains “critically” low in so many markets.
Retail-wise, Guy Grainger, head of retail, UK, said the sector was not only being hit by the economic downturn but by structural changes, particularly as more people shop online.
The results are a significant over-supply of space in UK towns outside the top 50. JLL reports that 50% of high street and shopping centre leases are to expire by 2015.
Up to 25% of existing high street and shopping centre leases are due to expire by 2013 or 50% by 2015 (versus approximately 5% and 15% for retail parks by 2013 and 2015 respectively).
JLL added that while retail requirements gravitating towards fewer locations has played out relatively slowly until now “the next 24 months are likely to see a swift and dramatic playing out of this polarisation as lease contracts expire”.
Grainger also predicted that “true values” will be realised for secondary property in 2012, particularly over the next few months.
In the industrial sector, JLL is expecting retailers to lead demand for logistics space while the trade sector will lead demand for standard industrial/warehouse units.
Development will be mainly demand-led. Tim Johnson, director, head of industrial and logistics, predicted: “There will be no speculative development of major warehouses in 2012.”
Focusing on the year ahead, Richard Batten, executive chairman UK at JLL, said; “This year will see a slow start, but hopefully a strong final burst to lift hopes for 2013. The last 12 months have led to a sober reassessment of recovery prospects for the UK economy.
"It is clear now that the financial crisis and the ongoing fiscal squeeze have left the domestic economy weaker than previously expected.
“Growth is likely to fall into two phases in 2012. The first six months are expected to be flat at best, with the possibility of a slight dip. But the second half should be brighter.
"Hard evidence on the direct economic effects of international sporting events is patchy, but they often mark a turning point in sentiment. It is hoped that the London Olympics will provide a much-need boost to confidence.
"This along with the benefits of another burst of asset purchases by the Bank of England should begin to have an economic stimulus after mid-2012, when activity is expected to improve, albeit fairly slowly.”
The full report can be viewed here.