JLL predicts occupiers will delay decisions in economy set to be “flat at best” in first half of year
This will be another tough year for UK property, though the second half may show some improvement, Jones Lang LaSalle predicts.
The agent’s head of forecasting, Andrew Burrell, said the consensus was that the wider economy would be “flat at best, with the possibility of a brief recession” in the first six months, reinforcing “growing evidence of corporate inertia”.
Occupier decisions “are likely to be delayed as long as the economic outlook is uncertain. Until that time, cost-cutting, not space expansion, will dominate and leasing activity will remain subdued. The outlook for investment volumes is to remain thin in the early part of 2012 too, with activity propped up by equity buyers such as private investors and sovereign wealth,” he summed up.
JLL’s head of UK offices, Neil Prime, said it was “highly unlikely” there would be much occupier expansion except in the media and technology sector. “Demand will be driven by lease expiries and breaks,” he said, and he expected to see an increase in the level of leases being restructured and renewed.
However, the present inactivity would build pressure on occupiers with lease expiries in 2014, which could lead to some prelets being signed later this year. In 2012, the firm has identified 6.2m sq ft of “structural lease events” in London and 8m sq ft in the South East, Birmingham, Leeds and Manchester.
Prime said grade A vacancy rates were “critically low” in some markets, such as the West End and Manchester: in the West End this would see more occupiers “migrate to King’s Cross, the South Bank, Midtown and the City, though their moves will be very product-specific”.
Although JLL is not forecasting any significant softening in prime values (see table), capital markets director Chris Ireland said secondary values had already fallen 10% at the end of 2011 and would fall at least as much again in H1 2012.
Low demand from buyers for high-yielding, non-core properties and “hugely constrained” debt finance meant yields would rise and activity would be low. But this could lead to opportunities and an increase in activity later this year, through an “increase in loan book sales resulting from banks deleverag-ing” and a “growing supply of assets from motivated sellers”.
Ireland said 2011 transaction levels had been “not too bad” and that JLL expected final UK volumes to come in at around £30bn, similar to 2010.
The firm advised on £1.5bn of investment deals in the last two weeks of December, two-thirds of these in London, where he said demand would stay strong.
Retail faces hit from online shopping
The retail property market faces the toughest time, JLL predicted, because it has structural as well as economic challenges to deal with.
Guy Grainger, director of retail, said the agent had looked at 10,000 UK lease expiries and found that half of all leases in shopping centres would expire by 2015 and a quarter by next year.
And, as Christmas trading figures from retailers such as John Lewis showed, consumers were doing more shopping online, which meant retailers would need less space than in the past.
He predicted “value falls “nearly everywhere” except in central London, the top 20 regional shopping centres and retail parks – where there would be opportunities to regenerate older out-of-town stock.
In 2012, he said, investment yields will rise “to reflect deterioration in rental prospects, capital expenditure assumptions, plus continued lack of bank debt to achieve target IRRs”.