Market forecasts indicate a lower risk of recession for the UK considering slow, but robust, growth in GDP being experienced owing to steady investment, consumer spend and greater commercial leasing signalling long term confidence in the economy. Prime yields have shifted outwards across the industrial, logistics, warehousing and retail sectors whilst residential rents have risen in line with inflation across London in particular.
Several signals of improving confidence in the economy are evident in the data produced by Savills which shows that new retail leasing deal count increased 8.9 percent in the second half of 2022, relative to the same time in 2021. Shopping centre investment especially grew with respect to transactional activity from £382m in deals for the first quarter of 2022 to £467m in deals in the second quarter.
Consumer spending has maintained its momentum despite 10.1 per cent inflation nationally, according to the Consumer Price Index, rising at an underlying level by 1.5 per cent in London over the last six months. As a result, whilst investors remain cautious, operators are proving opportunistic in rolling out expansion plans.
To service these needs, UK logistics experienced record levels of leasing activity whilst London office market take up was 13 per cent higher than its long term average over the first six months of the year. As such office, logistics and industrial yields softened 25 bps, according to Savills, to 4.79 per cent. Take up in logistics is 91 per cent above the long-term average, whilst a flight to quality means 93 per cent of office space under offer is Grade A.
Whilst the Bank of England predicts the UK will enter a recession by the fourth quarter, other market forecasts predict otherwise with Oxford Economics anticipating real 2023 GDP growth slowing to 0.8 per cent. Whilst the rising cost of debt has somewhat dampened investor liquidity, softer pricing across stabilised commercial assets looks set to encourage further capital deployment.
Rental improvements continue, despite cautious outlook for H2 2022. On a rolling four-quarter basis, net effective rents in Q2 2022 were up +13.9% YoY, while headline rents reported an +8.1% growth over the same period. This follows some leasing confidence creeping back within certain parts of the market, off the back of the pandemic restrictions in the previous year.