The UK property market has shown remarkable resilience over the past two years. But against the backdrop of rising interest rates and the change in demand for commercial property, we see declining or at the very least stalling property values.
Traditional ‘bricks and mortar’ retailers are facing difficult times and the data suggests a growing dispersion in performance depending on store location. The competition from online retailers appears to be leading to higher vacancy rates and a reduction of floorspace and lower rents in the best case, and bankruptcy in the worst (as Maplin and ToysRUs demonstrate).
Office properties, particularly in London, are also under pressure. Underlying data shows net rents falling by as much as 20 per cent, rising vacancy rates and a high volume of un-let space currently under construction in the capital.
But one bright spot comes from the industrial sector. Following a near continuous decline in industrial rents over the past 20 years, rents hit an inflection point at the start of 2014 and are up 19 per cent since. Interestingly, despite the pick-up in activity, there does not seem to be a rise in new development, resulting in an overall reduction of available space.
The outlook for residential is a bit starker. With UK rates set to rise (possibly five x 0.25 per cent by 2021), there are some estimates that house prices could fall by 15 per cent by the end of 2021, matching the 14 per cent drop in residential values between 2008-09.
A 15 per cent decline in UK residential property prices suggests the house price-to-income ratio retreats back towards its 30-plus year historic average. London might face a deeper decline of 19 per cent, exerting pressure on the buy-to-let market and forcing sales and reducing rents for tenants.
Only a better than expected outcome of Brexit and a more vibrant UK economy would make us change our outlook. In such a case, increased demand for the UK’s traditionally scarce property supply would counter the higher burden of the cost of finance.
