Newcastle Commercial Property agent reveals optimistic quarter of growth

Tony Wordsworth examines the latest quarterly economic and property market review

Tony Wordsworth
Tony Wordsworth

A generally optimistic picture is revealed in the latest quarterly Economic and Property Market Review for Quarter 1, 2014.

The study, by independent commercial property consultants GVA, concludes that the UK’s construction sector is gearing up for the next cycle, with construction output one of the fastest-growing contributors to GDP in the second half of 2013. This trend looks set to continue.

The construction Purchasing Managers Index from the CIPS /Markit survey has been at an almost record high in recent months, suggesting strong expansion, although much of this is attributed to areas outside of commercial property, notably housing.

However, activity in the main commercial property sectors is rising. The value of new construction orders saw a noticeable upswing in 2013. This was a modest increase, taking activity back up to 2009 levels, still only half of the average achieved in the decade to 2007 (which was itself a relatively constrained development cycle compared with the boom of the late 1980s).

The availability of development finance is still acting as a constraint.

The bulk of commercial development activity so far this decade has been in the central London office market. GVA’s office development maps show that 4.5 million sq ft completed in 2013, 2.8 million sq ft of which was let by the end of the year. 2014 is likely to be a much busier year, with more than 9 million sq ft of development potentially completing.

However, more than a third of this space is already pre-let, so we do not anticipate that this will lead to a marked increase in availability.

The restrained development cycle helped to limit oversupply during the prolonged recession and GVA’s recent Tipping Point research highlighted how undersupply is returning to the key regional city centres.

Our Big Nine locations have an average of just two years’ supply of grade A space available or under construction, based on average take-up over the last decade.

Supply is higher in the regional out-of-town markets, but our latest Business Parks survey shows an encouraging level of take-up and pockets of significant activity. Availability does seem to have peaked, although it remains historically high at almost 18%.

We are optimistic about office demand in our key regional city centres and take-up in 2013 was confirmed as the highest for five years. Lease expiries and rising corporate activity will generate increased activity, and the recent GVA report, Driving future growth: core cities and the knowledge economy, reveals the considerable opportunities our cities have to build on the knowledge and creative sectors to boost growth.

The nascent recovery in development activity and improving occupier demand should mean a gradual acceleration in rental growth outside central London this year and next. Meanwhile, average rental growth in the central London office market should continue at a rate well above inflation, and may well exceed last year’s 5.5%.

Strong variations in rental performance remain. Average retail rental values have yet to turn positive, while the regional office markets are now registering positive growth (just), and industrial rental values are starting to gather a little momentum.

All property rental values rose by 1% in 2013, as strong growth in central London and modest growth in UK industrials offset modest falls in the regional retail and office markets. We forecast acceleration in the rate of all property rental growth to 2.5% this year and more than 3% in 2015.

Tony Wordsworth, director and head of office agency, GVA, Newcastle

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